Dataset statistics
| Number of variables | 46 |
|---|---|
| Number of observations | 603 |
| Missing cells | 0 |
| Missing cells (%) | 0.0% |
| Duplicate rows | 0 |
| Duplicate rows (%) | 0.0% |
| Total size in memory | 221.4 KiB |
| Average record size in memory | 376.0 B |
Variable types
| CAT | 20 |
|---|---|
| NUM | 16 |
| DATE | 6 |
| UNSUPPORTED | 2 |
| PATH | 1 |
| BOOL | 1 |
earnings_for has constant value "603" | Constant |
earnings_for_string has constant value "603" | Constant |
period has constant value "603" | Constant |
remarks_tokenized has a high cardinality: 548 distinct values | High cardinality |
sentence has a high cardinality: 548 distinct values | High cardinality |
logit has a high cardinality: 542 distinct values | High cardinality |
h1 is highly correlated with o1 and 6 other fields | High correlation |
o1 is highly correlated with h1 and 6 other fields | High correlation |
l1 is highly correlated with o1 and 6 other fields | High correlation |
c1 is highly correlated with o1 and 6 other fields | High correlation |
o2 is highly correlated with o1 and 6 other fields | High correlation |
h2 is highly correlated with o1 and 6 other fields | High correlation |
l2 is highly correlated with o1 and 6 other fields | High correlation |
c2 is highly correlated with o1 and 6 other fields | High correlation |
estimate is highly correlated with actual | High correlation |
actual is highly correlated with estimate | High correlation |
ampm is highly correlated with time | High correlation |
time is highly correlated with ampm | High correlation |
remarks_tokenized is uniformly distributed | Uniform |
sentence is uniformly distributed | Uniform |
logit is uniformly distributed | Uniform |
ticker has unique values | Unique |
link has unique values | Unique |
header has unique values | Unique |
prepared_remarks has unique values | Unique |
name has unique values | Unique |
ticker_and_exchange has unique values | Unique |
v1 has unique values | Unique |
v2 has unique values | Unique |
symbol has unique values | Unique |
transcript is an unsupported type, check if it needs cleaning or further analysis | Unsupported |
article is an unsupported type, check if it needs cleaning or further analysis | Unsupported |
Reproduction
| Analysis started | 2020-09-29 00:36:55.081983 |
|---|---|
| Analysis finished | 2020-09-29 00:37:58.639555 |
| Duration | 1 minute and 3.56 seconds |
| Software version | pandas-profiling v2.9.0 |
| Download configuration | config.yaml |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| MITO | 1 |
|---|---|
| SBLK | 1 |
| CVGI | 1 |
| LVGO | 1 |
| UFS | 1 |
| Other values (598) |
| Value | Count | Frequency (%) | |
| MITO | 1 | 0.2% | |
| SBLK | 1 | 0.2% | |
| CVGI | 1 | 0.2% | |
| LVGO | 1 | 0.2% | |
| UFS | 1 | 0.2% | |
| LIZI | 1 | 0.2% | |
| MG | 1 | 0.2% | |
| RTLR | 1 | 0.2% | |
| EVOP | 1 | 0.2% | |
| AFYA | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
Frequencies of value counts
Unique
| Unique | 603 ? |
|---|---|
| Unique (%) | 100.0% |
Histogram of lengths of the category
Length
| Max length | 5 |
|---|---|
| Median length | 4 |
| Mean length | 3.60199005 |
| Min length | 2 |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| /earnings/call-transcripts/2020/08/27/bilibili-inc-bili-q2-2020-earnings-call-transcript/ | 1 |
|---|---|
| /earnings/call-transcripts/2020/08/10/avaya-holdings-corp-avya-q3-2020-earnings-call-tra.aspx | 1 |
| /earnings/call-transcripts/2020/08/10/commercial-vehicle-group-inc-cvgi-q2-2020-earnings.aspx | 1 |
| /earnings/call-transcripts/2020/08/07/aaon-inc-aaon-q2-2020-earnings-call-transcript.aspx | 1 |
| /earnings/call-transcripts/2020/08/12/revolve-group-inc-rvlv-q2-2020-earnings-call-trans/ | 1 |
| Other values (598) |
| Value | Count | Frequency (%) | |
| /earnings/call-transcripts/2020/08/27/bilibili-inc-bili-q2-2020-earnings-call-transcript/ | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/10/avaya-holdings-corp-avya-q3-2020-earnings-call-tra.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/10/commercial-vehicle-group-inc-cvgi-q2-2020-earnings.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/07/aaon-inc-aaon-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/12/revolve-group-inc-rvlv-q2-2020-earnings-call-trans/ | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/roku-inc-roku-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/elf-beauty-inc-elf-q1-2021-earnings-call-transcrip.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/11/dht-maritime-dht-q2-2020-earnings-call-transcript/ | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/zogenix-inc-zgnx-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/flir-systems-inc-flir-q2-2020-earnings-call-transc.aspx | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
Frequencies of value counts
Unique
| Unique | 603 ? |
|---|---|
| Unique (%) | 100.0% |
Histogram of lengths of the category
Length
| Max length | 93 |
|---|---|
| Median length | 93 |
| Mean length | 90.82421227 |
| Min length | 81 |
| Common prefix | /earnings/call-transcripts/2020/0 |
|---|---|
| Unique stems | 603 |
| Unique names | 603 |
| Unique extensions | 2 |
| Unique directories | 31 |
| Unique anchors | 1 |
| Value | Count | Frequency (%) | |
| /earnings/call-transcripts/2020/08/27/bilibili-inc-bili-q2-2020-earnings-call-transcript/ | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/10/avaya-holdings-corp-avya-q3-2020-earnings-call-tra.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/10/commercial-vehicle-group-inc-cvgi-q2-2020-earnings.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/07/aaon-inc-aaon-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/12/revolve-group-inc-rvlv-q2-2020-earnings-call-trans/ | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/roku-inc-roku-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/elf-beauty-inc-elf-q1-2021-earnings-call-transcrip.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/11/dht-maritime-dht-q2-2020-earnings-call-transcript/ | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/zogenix-inc-zgnx-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| /earnings/call-transcripts/2020/08/06/flir-systems-inc-flir-q2-2020-earnings-call-transc.aspx | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
| Value | Count | Frequency (%) | |
| alphatec-holdings-inc-atec-q2-2020-earnings-call-t | 1 | 0.2% | |
| niu-technologies-niu-q2-2020-earnings-call-transcr | 1 | 0.2% | |
| elf-beauty-inc-elf-q1-2021-earnings-call-transcrip | 1 | 0.2% | |
| golar-lng-ltd-glng-q2-2020-earnings-call-transcrip | 1 | 0.2% | |
| pae-incorporated-pae-q2-2020-earnings-call-transcr | 1 | 0.2% | |
| ares-commercial-real-estate-corp-acre-q2-2020-earn | 1 | 0.2% | |
| flowers-foods-inc-flo-q2-2020-earnings-call-transc | 1 | 0.2% | |
| ruhnn-holding-ltd-ruhn-q1-2021-earnings-call-trans | 1 | 0.2% | |
| parker-hannifin-corp-ph-q4-2020-earnings-call-tran | 1 | 0.2% | |
| diodes-inc-diod-q2-2020-earnings-call-transcript | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
| Value | Count | Frequency (%) | |
| dxc-technology-company-dxc-q1-2021-earnings-call-t.aspx | 1 | 0.2% | |
| 360-finance-inc-qfin-q2-2020-earnings-call-transcr | 1 | 0.2% | |
| talos-energy-inc-talo-q2-2020-earnings-call-transc.aspx | 1 | 0.2% | |
| niu-technologies-niu-q2-2020-earnings-call-transcr | 1 | 0.2% | |
| digi-international-inc-dgii-q3-2020-earnings-call.aspx | 1 | 0.2% | |
| targa-resources-corp-trgp-q2-2020-earnings-call-tr.aspx | 1 | 0.2% | |
| atento-sa-atto-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| zynga-znga-q2-2020-earnings-call-transcript.aspx | 1 | 0.2% | |
| golar-lng-ltd-glng-q2-2020-earnings-call-transcrip | 1 | 0.2% | |
| chesapeake-utilities-corp-cpk-q2-2020-earnings-cal.aspx | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
| Value | Count | Frequency (%) | |
| .aspx | 414 | 68.7% | |
| 189 | 31.3% |
| Value | Count | Frequency (%) | |
| /earnings/call-transcripts/2020/08/07 | 214 | 35.5% | |
| /earnings/call-transcripts/2020/08/06 | 102 | 16.9% | |
| /earnings/call-transcripts/2020/08/11 | 55 | 9.1% | |
| /earnings/call-transcripts/2020/08/10 | 43 | 7.1% | |
| /earnings/call-transcripts/2020/08/08 | 29 | 4.8% | |
| /earnings/call-transcripts/2020/08/13 | 22 | 3.6% | |
| /earnings/call-transcripts/2020/08/12 | 19 | 3.2% | |
| /earnings/call-transcripts/2020/08/14 | 14 | 2.3% | |
| /earnings/call-transcripts/2020/08/27 | 13 | 2.2% | |
| /earnings/call-transcripts/2020/08/25 | 11 | 1.8% | |
| Other values (21) | 81 | 13.4% |
| Value | Count | Frequency (%) | |
| / | 603 | 100.0% |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| AFMD earnings call for the period ending June 30, 2020. | 1 |
|---|---|
| NIO earnings call for the period ending June 30, 2020. | 1 |
| BBCP earnings call for the period ending June 30, 2020. | 1 |
| DEI earnings call for the period ending June 30, 2020. | 1 |
| FTNT earnings call for the period ending June 30, 2020. | 1 |
| Other values (598) |
| Value | Count | Frequency (%) | |
| AFMD earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| NIO earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| BBCP earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| DEI earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| FTNT earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| STNE earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| KIDS earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| SATS earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| BPMP earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| VREX earnings call for the period ending June 30, 2020. | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
Frequencies of value counts
Unique
| Unique | 603 ? |
|---|---|
| Unique (%) | 100.0% |
Histogram of lengths of the category
Length
| Max length | 56 |
|---|---|
| Median length | 55 |
| Mean length | 54.60033167 |
| Min length | 53 |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| I would now like to turn the conference over to Philip Taylor, Investor Relations. Please go ahead. Thank you, operator. Before we begin, I would like to inform you that comments and responses to your questions during today's call reflect management's views as of today, August 10, 2020, only and will include forward-looking statements and opinion statements. These include statements regarding our plans and expectations relating to regulatory clearance, including the process, time lines and expected outcomes; our commercial, operational, scientific, clinical and financial projection; products, including the uses benefits and applications of such products; our commercial and regulatory strategies; the impact of the COVID-19 pandemic and other future events. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our most recent Form 10-Q filed May 11, 2020 with the SEC. Our SEC filings can be found through our website or at the SEC's website. Investors are cautioned not to place undue reliance on forward-looking statements. Please note that this conference call will be available for audio replay on our website at pulsebiosciences.com on the News & Events section of our Investor Relations page. With that, I would now like to turn the call over to President and Chief Executive Officer, Darrin Uecker. Good afternoon. Thank you everyone for joining us today. This afternoon, we look forward to providing you with an update on all the recent progress made by our team at Pulse Biosciences. But before we begin, it is important for me to recognize the ongoing impacts of the COVID-19 pandemic outside our business. First, I would like to thank all the frontline health-care workers for their continued bravery an unwavering commitment to patient care. Our thoughts are with everyone who has been affected by this virus. It is clear at this point that the pandemic will persist in our communities for some time and we all must continue to be vigilant in our efforts to protect those around us. The health and safety of our employees remains our top priority and we are taking every precaution to ensure we create the safest workplace possible while observing all local and state health department regulations and guidelines. With that, as so many of experience disruption in their day-to-day lives, the pandemic has had an impact on our business as well. However, we are fortunate that to date these issues have not been significant and we have maintained our full workforce as we work through these challenging times. From the onset of these uncertain times, internally, we have relied on clear and concise communication of our objectives to maximize our productivity. The responsible attitude of our company, our single location and our current state of internal focus have been beneficial as we navigate the current landscape with the intention of bringing about improved conditions. Amid these unique circumstances, we remain excited about the opportunity ahead and confident we can execute our growth strategy over our next phase of growth. We remain focused on achieving regulatory clearances and continued progress toward commercialization of our proprietary technology along with the introduction of the CellFX System first to the aesthetic dermatology market. Now for anyone new to Pulse Biosciences, I would like to provide a quick background on our business. Our mission is to offer bioelectric medical solutions that make a meaningful difference for the betterment of patients and clinicians. We believe our device, the CellFX System will be capable of offering such benefits. The CellFX System is a multi-application platform that harnesses our proprietary Nano-Pulse Stimulation technology. NPS technology delivers nanosecond pulses of electrical energy to non-thermally clear undesired cells while sparing adjacent and needed non-cellular tissue. In the area of Dermatology this highly differentiated cell specific mechanism of action provides the ability to address cellular lesions that were not well addressable previously and at the same time, prevent collateral damage to the surrounding healthy skin. This enables clinicians to generate patient and caregiver friendly improved outcomes as older modalities typically result in a skin appearance that could be worse than the original condition. The CellFX System is a console based software-enabled device designed to accommodate the clinical workflow preferred by dermatologists. Based on our extensive industry experience and collaborative process with clinicians we design our CellFX System with an integrated cloud infrastructure we call CellFX Cloud Connect. It is the backbone of our innovative utilization-based business model that aligns the operational and financial interests of patients, practices and the company. CellFX Cloud Connect makes possible the wireless connectivity between the customer CellFX System, our e-commerce customer portal, clinical practice management tools to track utilization data and other operational metrics that are tracked by our internal customer relationship management and enterprise resource planning software systems. The customer portal is where practices purchase and wirelessly download cycle units directly to CellFX System. Cycle units on a per lesion basis, so the more lesion, the patient once cleared, the more cycle units consumed. This enables the physicians to have identifiable and controllable fixed costs per lesion and to charge the patient on a per lesion basis, which is aligned with the patient preference. Our model contrast with the currently employed disposable and single-use based medical device models, removing the friction for the physician that can occur in those models. One last note about the CellFX Connect is that it facilitates direct connectivity for pulse to remotely perform software upgrades to the CellFX System as well as provide several service and maintenance functions in real time. Because of this stability to streamline, be responsive and prevent disruptions of the clinician workflow, CellFX Cloud Connect allows us to provide unprecedented support and clinical practice growth enablement for our future customers. Turning now to our business objectives. On the call today, we are pleased to highlight our progress and developments in the three corporate priorities we laid out on our last call. First, on our regulatory clearance for our CellFX System, both in the US and in key territories outside the US, namely the European Union and Canada. And second, preparations for commercial launch of the CellFX System in these territories. And third, financing, with the closing of the rights offering in June. I will start off by addressing the successful close of our recent financing. On June 16, 2020, we closed the rights offering, generating net proceeds of $29.5 million for the company, with the potential for additional gross proceeds of $4.5 million through the exercise of issued warrants. The capital resulting from this shareholder friendly transaction has significantly strengthened the balance sheet and will provide the runway necessary to progress our other two corporate priorities, regulatory clearances and commercial launch preparations. We are thankful for this strong display of support and confidence from stockholders. Sandy will provide additional details on this very successful financing later in the call. Now to our second priority. On the regulatory front, our top objective is achieving 510(K) clearance for the CellFX system with an indication for use in general dermatology. As we mentioned previously, in May, we had a pre-submission or Q-Sub meeting with FDA in which we confirmed three imperative items regarding our subsequent work. The regulatory path for 510(K) general dermatologic indication for the CellFX System the adequacy of the selected credit [Phonetic] device and then our proposed preclinical studies performed under FDA's good laboratory practices would be sufficient for the indication and support of our 510(K) clearance. We receive solid confirmation of all of these items. It is important to note that the confirmed preclinical studies used animal skin and that no further human studies would be required for this submission. With a study design locked in, we began working with the GLP animal facility on the protocol and pilot activities for the general dermatologic study. Because of COVID-19, these labs were not operating at full capacity in June and are still operating at a restricted capacity to an extent as we update you today. Due to this constrained capacity, we began our study several weeks after our initial plan and we currently expect to submit this 510(K) in the next 60 to 90 days. On the positive side, we are pleased to report that we have now completed all the preclinical treatments required for the study. The next steps will include the pathology assessments of the skin treatment samples at the different follow up time points. Then with the data in hand, we will analyze, evaluate and prepare it for the 510(K) submission. We continue to be optimistic that the advantages of a general dermatology indication submission being more straightforward combined with the FDA's prior knowledge of our system and the data being provided could potentially result in a clearance somewhere between December year-end 2020 and Q1 2021. Our stepwise regulatory approach will continue with the pursuit of specific indications following the CellFX Systems initial clearance. While the submissions will be sequential we are able to parallel path some of our work. The next indication we will pursue is sebaceous hyperplasia or SH. On our May investor update call, we reported that we would be requesting a formal pre-submission meeting with FDA to discuss the required SH study design. Today, we are pleased to report that we requested the meeting in June and just last week had the meeting with the FDA. Leading up to the meeting, we received feedback from FDA on the draft study protocol, we provided meeting request. The meeting was very productive and we were able to agree with FDA on the basic design of the clinical study that would support a specific indication clearance for SH. Based on this, our next step is to incorporate FDA feedback into our investigational device exemption or IDE submission and submit this to FDA for approval to move forward with execution of this study. We anticipate submitting the investigational device exemption in the next couple weeks and to begin enrollment, it is important comparative trial in the fourth quarter. Barring any delays due to COVID-19, we estimate enrollment will take approximately three months. We plan to follow a similar path to achieve indications for warts and seborrheic keratosis, and we'll report on our timelines for this on upcoming calls. Onto our efforts to commercialize the CellFX System in the European Union by obtaining the CE Mark. As we discussed on our previous investor call, the delayed implementation of new regulations for medical devices in the EU due to the impact of COVID-19 has provided an opportunity to potentially receive a CE Mark for the CellFX System six months to nine months sooner than we otherwise would have been able to. And we are pleased to report that we continue to track according to this accelerated plan. Over the last several months, we have worked closely with our EU notified body, the company authorized to assess our compliance with the European Medical Device Directives or MDD and authorized use for the CE Mark. And we recently achieved the important milestone of submitting all required documents in support of the application for the CellFX System CE Mark. The application is currently under review and based on our discussions, we continue to believe we will gain approval for the CE Mark in quarter one, 2021, leading the commercialization of the CellFX System in the EU. We also continue to make progress on Canadian regulatory approval, another important territories. The Health Canada process leverages the work we are doing for the CE Mark and, therefore, we believe we will be in a position to submit an application for the CellFX System to Health Canada in Q4 of this year with the Canadian clearance in the first half of 2021. Now I will turn the call over to Ed to provide more details on our continued engagement with the scientific dermatology community. Thanks, Darrin. I will begin by sharing new marketing research on the continued business recovery in aesthetic dermatology practices, our target customers as they resume there are elective procedures, while navigating COVID-19 patients and staff safety measures. Next, I will highlight recent additions to our effort, expanding foundation of clinical evidence presented and published regarding the successful use of NPS technology on various difficult to clear skin lesions and describe our continued engagement with the scientific community as this important research is being published in peer-to-peer settings. Starting with our new marketing research regarding the continued recovery of the aesthetic procedure market, as patients continue to demand these services. Compared to the same marketing research fielded in May, our newest marketing research shows clear trends of both increases in current procedure volumes compared to last May and more bullish projections of a continued recovery over the next six months. Back in May, surveyed aesthetic procedure offices were operating at less than 50% of capacity, including almost complete elimination of elective aesthetic procedure due to COVID concerns and constraints. In the most recent July survey, the majority of dermatologists reported that patients future volumes had been restored to 50% or more of normal levels and the majority of practices have now opened their office to elective procedures. Regarding expectations for the future of patient volumes, the majority of physicians continue to project will take about six more months to return to normal procedure volumes. Taken as a whole, this new marketing research represents encouraging signs that the aesthetic specialty physician is thoughtfully implementing prudent COVID safety guidelines and that patient confidence in those safety measures is being reflected with a growing backlog of future appointments for aesthetic procedures. Again, these new marketing research findings all point through growing of optimism from aesthetic dermatology practices that they can keep their patients, their staff and themselves safe and invite patients back into their office for elective procedures. This optimism and trending to normal procedure levels is further supported by recent reports from our Scientific Advisory Board that their practices are continuing to experience high demand for scheduling aesthetic procedure appointments and have a backlog of several months of patient appointments. This is equally true intentions to continue and expand new clinical research projects for companies like Plus. As we're ready for the launch of our CellFX System in aesthetic dermatology, we have remained actively engaged with our key opinion leaders and clinical investigators who are experiencing increased demands for NPS technology to be presented at virtual scientific meetings and published in various dermatology specialty journals. Thanks to these continuing successes. There is a growing awareness and acceptance of NPS as an important new technology in as a research results and clinical findings continue to be presented at scientific meetings and published in the leading peer-reviewed journals like the American Society of Laser Medicine and Surgery Journal and the American Society of Dermatologic Surgery Journal as well. But we are pleased to see how innovative and effective the first dermatologists professional societies have been embracing and enhancing their virtual meetings to share their experiences with emerging technologies like NPS. There are some silver lining benefits to these virtual events including physicians having on demand access to this recorded scientific content that's available beyond those scheduled conference dates and their ability to share access to associates and clinic staff. As we mentioned on the previous call, the American Society for Lasers and Surgery and Medicine or ASLMS posted their annual conference this past month as a virtual meeting. NPS technology research was featured as its own new category of energy device. With the large selection of papers including updates on three of our recent clinical studies and e-posters on the two preclinical studies for a total of five abstracts presented at this important conference of energy device specialists. Our newest clinical results were presented by Dr. Victor Ross, Cast ASLMS President and Pulse Scientific Advisory Board member, who presented early data from our pivotal study in cutaneous non-genital warts. He reported a 79% complete clearance of warts including clearance in the warts that have failed to clear with previous treatment methods. These new data showing high rates of clearance in difficult to treat warts in a large clinical study represent a significant commercial opportunity for NPS in the future. Another important commercial application for NPS on which new data was presented is Sebaceous Hyperplasia or SH, which is a very common but difficult to clear facial lesion. The large multicenter clinical study was presented by Dr. Gilly Munavalli, a post clinical investigator and a member of our Scientific Advisory Board. These new findings prove that our energy settings both maintained efficacy and reduced healing time after these difficult to treat lesions were cleared by NPS. Another important presentation was given by the incoming, President of the ASLMS and also a member of our Scientific Advisory Board, Dr. Thomas Rohrer. He shared positive results in our first human feasibility study of NPS to clear biopsy confirm nodular Basal Cell Carcinoma or BCC. Dr. Rohrer discussed the successful elimination of BCC and the unique advantage of NPS to preserve the healthy non-cellular derma surrounding the malignant cells of BCC nests. This unique potential safety advantage for NPS was illustrated by independently rated clinical photographs and histological evidence of a normal epithermal recovery process and a low potential for scar formation compared to the current standard of care. The very positive findings from this feasibility study of Basal Cell Carcinoma, which is the most frequently occuring form of skin cancer, will be the basis for designing future studies of BCC, that are just part of our long-term development plan for the NPS platform for multiple applications in dermatology. The bright future of NPS technology was further highlighted at the ASLMS virtual conference into e-poster presentations. One was by Dr Brian Berman, showing that NPS could be used in combination with our modifier drug to synergize marine melanoma tumor clearance. And the second poster presentation by Dr. Brian Zelickson that provided key insights and evidence on the NPS cellular mechanism of actions by using high resolution electron microscopy images and demonstrates how NPS energy induced changes in the intracellular organelles such as the mitochondria and other vital cellular organelles. At the same meeting corresponding aspects for the SH warts, Basal Cell Carcinoma and acne studies were published in the print and online versions of the 2020 ASLMS abstracts publication, which is a special supplement of the official ASLMS Journal, lasers and surgery medicine. This is a publication that is frequently read and cited by physicians that specialize in the use of these energy-based devices. Two weeks ago, there was another virtual meeting of aesthetic specialist called The Symposium for Cosmetic Advances and Laser Education or SCALE. This symposia is considered one of the most premier multi-disciplinary meetings for cosmetic and medical dermatology. The prestigious scale faculty members are considered among the peers as respected scientific opinion leaders, many of whom are also Pulse Biosciences Scientific Advisory Board members or clinical investigators. Over 350 physicians registered for this event and NPS technology was spotlighted on the opening day of this virtual conference. First Dr. George Hruza, the 2019 American Academy of Dermatology President and early Pulse Investigator included NPS technology in his all about technology plenary session. He explained the cell specific mechanism of NPS and it's high efficacy and clearing SK lesions with a low risk of scar. Next Dr. Victor Ross delivered a 10-minute presentation dedicated to NPS Technology, where he highlighted, it's non-thermal cell specific mechanism of action benefits across several common dermatology applications, including sebaceous hyperplasia, seborrheic keratosis, cutaneous non-genital warts and basal cell carcinoma. These two recent virtual scientific meetings are a testament to the importance and impact of our continuing investment in clinical evidence and growth in scientific information validating the unique properties of NPS technology with the potential for a broad spectrum of clinical applications in dermatology. As of July 15, 2020, our clinical database has expanded to over 630 clinical study in patients with NPS results from over 34,00 treated benign and non-benign lesion procedures in human skin. Our commitment to high-quality science generated in partnership with some of the most respected leaders in dermatology has resulted in important advances in clinical outcomes, and then device development optimization that brings us closer to commercial product and production. And a receptive market for NPS technology based on our growing scientific foundation of acceptance and advocacy among key opinion leaders. While COVID production -- precautions may have constrained live physician meetings are prominent virtual presence as a live and ongoing in the scientific community. Now I'll turn the call over to Sandy for more on the financials. Thank you, Ed. For the second quarter of 2020 operating expenses were $11.4 million compared to $11.6 million for the prior year period. Decreases in research and development costs were partially offset by increases in general and administrative costs. Operating expenses for the three months ended June 30, 2020, included $2.4 million of non-cash stock-based compensation versus $2.7 million in the year ago period. General and administrative expenses consist of salaries and related employee expenses for executives, sales and marketing, finance, legal, human resources, information technology and administrative personnel, as well as professional fees, patent fees and costs, insurance costs and other general corporate expenses. General and administrative expenses increased by approximately $200,000 to $5.3 million for the three-month period ended June 30, 2020 from $5.1 million during the same period in 2019, primarily related to increased personnel from a year ago, offset by a reduction in marketing related outside service costs. Research and development expenses consist of salaries and related expenses for manufacturing, research and development personnel as well as clinical trials and consulting costs related to the design, development and enhancement of our potential future products. Research and development expenses decreased by $0.4 million to $5.9 million for the three-month period ended June 30, 2020 from $6.3 million during the same period in 2019, primarily due to reduced clinical trial expenses and development costs associated with the CellFX System. Net loss for the second quarter ended June 30, 2020 was $11.3 million compared to $11.4 million for the second quarter ended June 30, 2019. Excluding the net proceeds of the rights offering received in the three months ended June 30. Cash used in the second quarter totaled $7.9 million. Cash, cash equivalents and investments totaled $37.8 million as of June 30, 2020 compared to $15.9 million as of March 31, 2020. The successful completion of the rights offering generated net proceeds of $29.5 million. The basic subscription and oversubscription received totaled $56 million far exceeding the $30 million offering amount. The structure of this transaction served two important purposes. It maximize the net proceeds to the company by minimizing transaction costs compared to a traditional public offering of common stock and that afforded stockholders the right to participate maintaining their ownership position. Our Board of Directors approved the subscription price per unit equal to the lessor $7.01 the closing price of our common stock on April 23, 2020 or the volume weighted average price of our common stock for the five trading day period through and including the subscription expiration date of June 8. Upon the expiration of the subscription period, the subscription price per unit was determined to be $7.01, approximately 642,000 warrant with a cash exercise price of $7.01 per warrant share were also issued in the rights offering. Additional gross proceeds of approximately $4.5 million may be received from the exercise of these warrants. In addition to the strong display of import and confidence from our stockholders, this confidence was also reflected internally with insider participation totaling approximately $1.1 million. This excludes participation by Chairman, Robert Duggan. We are very pleased with the results from this offering and the strength of our balance sheet. Now I will turn the call back to Darrin. Thank you, Sandy. To conclude, amid the challenging circumstances created by COVID-19 we persisted and had a very productive quarter at Pulse Biosciences. We have adapted our operations, prioritize the safety of our employees while maintaining our driven and collaborative culture. We are progressing the CellFX System allowing multiple regulatory path for multiple indications with FDA, the CE Mark and Canadian approval. To reiterate our upcoming milestones, we expect to submit our 510(K) for a general dermatologic indication within the next 60 days to 90 days. Starting our SH comparative study to support a specific indication in the US, which we expect to begin in early Q4. Working with our notified body toward completion of the review process for the CE Mark, which we expect to occur in quarter one 2021 and a Health Canada approval expected in the first half of 2021. At the same time, engagement with the scientific community albeit through new mediums like digital platforms and virtual events remain high. Recent programs have featured many positive investigational studies regarding our Nano-Pulse Stimulation technology. Leading key opinion leaders in this space continue to support our technology and educate other dermatologists on its variety of benefits. Again, I would like to thank our employees for their dedication and commitment to our progress over these trying past few months. All of your efforts are appreciated. Through a continued strong collaborative effort, we are confident we will be able to execute our strategy throughout the coming months and achieve approval for our CellFX System. We are excited about the potential benefits, NPS will provide to patients and clinicians across various unmet needs. We look forward to providing you updates in the future. Before we move into Q&A, I would like to welcome Richard van den Broek to our Board of Directors. We are very excited about the experience and leadership he brings to the company. Joining me for Q&A is Ed Ebbers, Executive Vice President and General Manager, Dermatology; and Sandy Gardiner, Executive Vice President and Chief Financial Officer. Operator, let's open the call for questions. | 1 |
|---|---|
| Welcome to the BellRing Brands third-quarter 2020 earnings conference call and webcast. Hosting the call today from BellRing Brands are Darcy Davenport, president and chief executive officer; and Paul Rode, chief financial officer. Today's call is being recorded and will be available for replay beginning at 1:30 p.m. Eastern Time. The dial-in number is (800) 585-8367 and the passcode is 9248828. [Operator instructions] It is now my pleasure to turn the floor over to Jennifer Meyer, investor relations of BellRing Brands for introductions. You may begin. Good morning, and thank you for joining us today for BellRing Brands third-quarter fiscal 2020 earnings call. With me today are Darcy Davenport, our president and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks. And afterwards, we'll have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the investor relations and the SEC Filings section at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. Thanks, Jennifer, and thank you all for joining us this morning. Last evening, we reported our third-quarter results, as well as posted a supplemental presentation to our website. This presentation is designed to provide more insight into our business, consumption and key metrics. We reported third-quarter sales of $204 million and adjusted EBITDA of $38.5 million. As we discussed last quarter, we ended Q2 with inflated trade inventories after our customers overbought following the mid-March consumer stock-up. This elevated Q2 sales at the expense of Q3 and factored into our second-half planning. In reaffirming guidance in May, we highlighted that the second half would be backloaded warded. More specifically, we expected roughly 56% of our second-half revenue to fall into the fourth quarter. With July net sales coming in at close to $100 million, this plan is proving out. Outside of the timing shift, our actual results were shy of our internal expectations, mainly due to a slower-than-expected RTD category recovery as a result of less on-the-go occasions. Specifically, we forecasted a consistent improvement from the April low reaching pre-COVID levels by June. Instead, we saw more of a W-shaped recovery, with May dipping back down and not reaching pre-COVID levels until after the quarter ended in July. Coupled with longer-than-expected international recovery, this shaves $50 million to $60 million from our second-half sales forecast, which is equally split between Q3 and Q4. Although we are seeing encouraging signs in the July RTD category consumption period, we lowered our Q4 growth assumptions given the choppy recovery we experienced in Q3. However, because of the overperformance in the first half, combined with nonstrategic SG&A reductions in the back half of the year, we still expect to deliver our full-year EBITDA in line with our original expectations. I'd like to now focus on brand highlights, progress against our growth strategies and end with our outlook. Despite strong COVID category headwinds, Premier Protein shake consumption was strong this quarter, up 11% across both tracked and untracked channels. Untracked outpaced tracked channels, growing 33% in the quarter, while tracked declined 4.5%. eCommerce, Premier Protein's third largest channel, led the way, up an amazing 185%. We also saw terrific growth in food and drug, up 38% and 33%, respectively, driven by distribution and increased marketing and promotion. July consumption has remained strong, up 12% in tracked and untracked channels. Untracked continues to drive our growth, up 39%, while tracked channels faced headwinds in July due to promotional timing shifts that will reverse later in the quarter. Now to our growth strategies. Strong marketing programs continue to be drivers for the brand. Premier Protein increased two share points in the quarter to 18% of the RTD category. Our promotional strategy remains effective, driving approximately 40% of our consumption growth and TDPs continue to increase, up 6% in the quarter. Premier Protein household penetration substantially increased year-to-date to 6.6%, supported by media, including television advertising. Our new products continue to perform well and are gaining distribution. Café Latte and our powder product velocities are ranked in the top 10% of the category. Protein with Oats continues to sell well, and we have gained expanded distribution, which we will see in the next two quarters. I'm excited about our pipeline of new products coming out over the next several months, including welcoming back my personal favorite, Pumpkin Spice, that ships this month. Now to our other brands. Dymatize's domestic business had a good quarter, up 9%, led by club and eCommerce. Our launch of ISO100 Cocoa and Fruity PEBBLES had quickly shown success, ranking in the top 10 SKUs where it is sold. Unfortunately, both Dymatize and PowerBar's international businesses continue to be challenged as a result of COVID. Our supply chain remains stable. During the quarter, we successfully brought online a fifth co-manufacturing location. This was challenging given the COVID environment, and I'm proud of our team's hard work on this achievement. This additional capacity gives us further flexibility to support our growth plans. Now to our outlook. That pandemic has created strong category headwinds, and the slower-than-expected recovery has affected both of our domestic and international businesses. As a result, we have lowered our back-half sales; however, despite those challenges, we still expect to deliver double-digit net sales growth for the year. In Q4, we have significant growth drivers lined up, including promotions in most major retailers, expanded distribution, and we already have a strong July in the books. Given we exceeded our expectations for the first two quarters and are we confident in our ability to achieve our Q4 forecast, I'm happy to reaffirm our full-year EBITDA guidance. I'm incredibly proud of our company, and I don't want to miss the opportunity to publicly thank all of our employees and our co-manufacturing partners for navigating this stressful time. I continue to have confidence in our brand fundamentals, and I'm energized by the business momentum, expanded distribution, innovation pipeline and our long runway for growth. I will now turn the call over to Paul. Thanks, Darcy, and good morning, everyone. Net sales for the quarter were $204 million and adjusted EBITDA was $38.5 million. Third-quarter results, as anticipated, were pressured by the impact of COVID, as well as changes in customer inventory levels when compared to prior year. COVID impacted our quarterly net sales results on several fronts. First, it took longer for retailers to reduce their on-hand RTD shake inventory from inflated levels at the beginning of the quarter. Second, as Darcy detailed, the RTD liquid category had significant headwinds. Third, our international business, which historically has accounted for 50% of our net sales declined significantly compared to last year. Though we anticipated many of these impacts, the category recovery was slower than expected. From a shipment perspective, Premier Protein net sales declined 12%, with RTD shake net sales down 10%. The disconnect between shipments and our strong 11% consumption growth for RTD shakes was largely expected. Shipment delayed consumption as retailers worked through an overbuy in March. Additionally, recall we lapped last year's pull-forward shipments related to a fourth-quarter promotion. These inventory related headwinds were partially offset by strong distribution gains across channels. Dymatize has strong growth in the club and eCommerce channels, which combined grew 50% in the quarter. We anticipated strong growth for these channels in the second half, and the brand continues to gain distribution in FDM and club while consistently delivering double-digit growth within eCommerce. This growth was outlaid by COVID-driven declines globally for the specialty business, resulting in an overall net sales decline of 16.6%. PowerBar net sales declined 44%, reflecting the impacts from our portfolio optimization strategy in North America and lower international volumes driven by specialty store closures. We expect COVID to weigh on the brand's results in the fourth quarter, but the decline should moderate now that we have fully lapped the portfolio optimization strategy in North America. Turning back to consolidated results. Gross profit of $69 million declined 24% this quarter, with gross profit margin declining 450 basis points to 33.6%. The margin decline related to anticipated higher input costs, primarily milk-based proteins, and a higher trade promotion rate. SG&A expenses as a percentage of net sales increased 240 basis points to 16%. This increase was driven by a strategic increase in marketing spend of $2 million and $2.1 million of incremental public company costs, offset partially by lower compensation expense. Adjusted EBITDA for the quarter was $38.5 million, a decrease of 37.1%, with an adjusted EBITDA margin of 18.9%. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We had a strong third quarter for cash flow, generating $32 million from operations, and we repaid the $65 million we had borrowed under our revolver as a precautionary measure in light of the uncertainty COVID created. This left us with $22.5 million of cash on hand and $145 million available under our revolver at quarter end. As of June 30, net debt was $715 million and net leverage was 3.8 times. Although this is an increase in leverage from last quarter, it is in line with our expectations given our quarterly adjusted EBITDA compared to prior year. We still expect the end of fiscal year with materially lower net leverage and to reach our net leverage target of 3 times in fiscal 2021. Turning to our outlook. We are pleased to reaffirm our fiscal year 2020 adjusted EBITDA outlook of $192 million to $202 million. However, based on lower second-half expectations due to COVID, we have adjusted our net sales range to $960 million to $980 million. In spite of COVID headwinds, the fourth quarter is expected to deliver strong double-digit top line growth driven by Premier Protein RTD shakes, which will benefit from distribution gains and incremental promotional activity. We anticipate the remainder of our brands will be weighed down by the lingering impacts of COVID, especially the domestic and international specialty businesses. For Dymatize, these headwinds are expected to more than offset continued strong gains in e-commerce, club and FDM. Overall, we are confident in our ability to deliver strong fourth-quarter results. Category dynamics have improved from the third quarter and the fourth quarter is off to a great start as evidenced by our strong July net sales. Premier Protein, which is 80% of our net sales, has continued to register double-digit consumption growth in the face of COVID, and we expect that growth trend to continue in Q4. With that, I'd like to turn the call back over to the operator for questions. | 1 |
| Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunoco LP's Second Quarter 2020 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Scott Grischow, Vice President of Investor Relations. Thank you. You may begin. Thank you, and good morning, everyone. On the call with me morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Karl Fails, Chief Operations Officer; and other members of the management team. A reminder that today's call will contain forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors. During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. I'd like to begin today's call by reviewing the financial and operating results for the second quarter of 2020. Despite the reduced volume we saw this quarter, our business performed well, and our cost reduction efforts are on plan. We are on solid financial footing as we continue to navigate this challenging environment. For the second quarter of 2020, the partnership recorded net income of $157 million, which included the benefit of a $90 million noncash inventory adjustment. Adjusted EBITDA was $182 million compared to $152 million in the second quarter of 2019. Fuel volumes totaled 1.5 billion gallons, down 26% from a year ago. The second quarter volumes reflect a full quarter's impact of COVID-19 on our business. Fuel margin was $0.135 per gallon, up from $0.091 per gallon for the same period last year. Lease income of $34 million was essentially flat, both sequentially and year-over-year. Our gross profit from non-motor fuel sales was $30 million, which represented a $22 million decline from the previous quarter. As a reminder, the first quarter included an $18 million favorable legal settlement. Total operating expenses for the quarter decreased to $97 million from $143 million in the first quarter and $123 million a year ago. Karl will provide additional detail on expenses in his remarks. Moving on to capital. We spent $14 million on growth projects and $4 million on maintenance capital in the second quarter. As we announced in March, we expect to spend approximately $75 million in growth capital for the full year and approximately $30 million in maintenance capital. Second quarter distributable cash flow as adjusted was $122 million, yielding very strong coverage ratios of 1.41 times for the current quarter and 1.55 times on a trailing 12-month basis. On July 28, we declared an $0.8255 per unit distribution. On the balance sheet, our long-term debt decreased by $110 million to just under $3.1 billion. Our liquidity remains strong, with $1.3 billion remaining under our revolving credit facility and no debt maturities prior to 2023. We ended the quarter with a leverage reading of 4.07 times, down from the 4.39 times in the first quarter. Finally, as many of you saw in our June press release, Sunoco LP's Chief Financial Officer, Tom Miller, is retiring from Sunoco effective September 1. On behalf of the entire Sunoco LP leadership team, we would like to personally thank Tom for his many contributions to the partnership and wish him health and happiness in the next chapter of his life. I will now turn the call over to Karl. Thanks, Scott, and good morning, everyone. Our strong results in the second quarter highlight the resiliency of our business model, even in the face of the continued impact of COVID. As Scott mentioned, our second quarter volumes were down 26% compared to last year. Looking more closely at the monthly trends, volumes bottomed in mid-April with year-over-year declines of around 45%, but showed meaningful improvement from there. In May, our volumes were off about 30%, followed by a decline of about 15% for June. The pace of continued recovery in fuel demand has flattened over the last several weeks with the rise in coronavirus cases in some geographies. For the month of July, we averaged about 15% of last year's volumes and have seen similar results in the mid-teens in early August. Our normal seasonal pattern is for average daily volume to rise each month from the beginning of the year to a peak in August at the end of the summer. This means that even as volumes have flattened on a relative basis, we have seen increases in absolute volumes so far in the third quarter. I'd like to provide some context around these volume trends. We have clearly benefited from the geographic diversity of our fuel distribution network. While demand in southern states held up more strongly than in other areas of the country during the onset of the pandemic, it has been more impacted on a relative basis in recent weeks as re openings are scaled back. Contrast this with the mid-Atlantic and Northeast states, which continued to see improvement as re openings progress. While volumes were notably weak in the second quarter, fuel margins showed consistent strength throughout the quarter, even in the face of increasing commodity prices. These strong margins have continued into July and August. Taking a macro look, the strong margins can be primarily attributed to broader market forces that have impacted the industry over the course of the last few months. Fuel volume declines across the country increased the breakeven cost for many operators and provide favorable margin environments for market participants from single site operators to companies with scale. These increased fuel margins have done much of the work to offset the gross profit impact in each channel of distribution. The volume declines and resulting margin increases also occurred in a favorable environment for the consumer, as the average retail price for gasoline during the second quarter was the lowest since 2016. While these market forces provide a favorable landscape for our gross profit optimization strategies, the rest of the work must be done through expense reductions. We are skilled and strongly positioned in both of these areas, and thus have been able to weather demand declines as well or better than most. We have a deep knowledge of the markets where we operate and had committed organizational resources to gross profit optimization and expense management well before this recent demand shock. Scott mentioned our total expenses of $97 million for the second quarter and that we are on plan to deliver total expenses of between $460 million and $475 million for the full year 2020, consistent with our commentary last quarter. Since a portion of the expense reductions consisted of volume-related items, we would expect that the second quarter would be our lowest expense quarter of the year. As volumes have recovered, we anticipate quarterly expenses in the back half of the year being higher than our second quarter run rate, but well within the range that we have communicated. As we look forward to the second half of 2020, there is still uncertainty around the shape of the volume recovery curve. However, we expect market forces and our gross profit optimization strategy to result in fuel margins remaining above our historical annual range. Our commitment to expense management delivers results directly to the bottom line. As our second quarter performance demonstrates our ability to optimize within the current market environment as well as our focus on capital and expense management will remain key. We are confident that our demonstrated strength in operational and financial discipline will continue to yield solid financial results throughout the rest of the year and beyond. I will now turn it over to Joe to share some closing thoughts. Joe? Thanks, Karl. Good morning, everyone. Let me start off by thanking our employees and our field distribution partners for their continued dedication in keeping Sonoco strong and stable during these unprecedented times. Last quarter on our earnings call, we suspended our 2020 EBITDA guidance, given the heightened level of uncertainty at that time. Today, we have far better clarity for the rest of the year. As a result, we believe our 2020 EBITDA will be greater than $700 million, which is above the original guidance that we provided last December. Our revised outlook has been shaped by a few key items. The first item is obvious. We have delivered two really strong quarters that are already in the books. Second, we believe the fuel margin environment will remain attractive. Although the exact shape of the demand recovery curve is still to be determined, we expect the margin environment to be above historic average. It is too early to determine whether recent events have established a new long-term baseline for margins. However, we believe the industry breakeven point for fuel margin has gone up for various operators, meaning certain operators will require greater margins to remain profitable, and this is good for us. In a different scenario where volume rapidly recovers and fuel margin reversed the previous mean, this is also good for us, less margin but more volume. Overall, I believe the gross profit environment for the second half of the year will remain very attractive. But it will be difficult to match the first half of this year given the historic drop in crude prices that occurred in March. Finally, a revised outlook reflects our ability to deliver on the expense guidance that Karl noted earlier. The path we're on now to have an exceptional strong year was not exactly how we envisioned or described it back in December. However, despite the obvious challenges facing our nation, we expect to deliver yet another strong year. Our financial stability has positioned us for growth. We continue to deploy capital to grow our fuel distribution business. The opportunity sets remain robust, and we expect these organic opportunities to remain year after year. On the midstream side, we have rededicated resources to look for highly synergistic acquisitions that further enhance our overall portfolio. Let me close by saying that over the last few years, we have built a very resilient business model. We remain proactive throughout the current challenge as well as any future challenges to ensure a stable long-term future for Sunoco. Operator, that concludes our prepared remarks. You may open the line for questions. | 1 |
| I would now like to turn the call over to the company. Please go ahead. Good morning. I'm Christine Lindenboom, Senior Vice President of Investor Relations and Corporate Communications at Alnylam. With me today on the phone are John Maraganore, Chief Executive Officer; Barry Greene, President; Akshay Vaishnaw, President of R&D Jeff Poulton, Chief Financial Officer; and Yvonne Greenstreet, Chief Operating Officer. Andy Orth, Head of the U.S. Business, is also on the phone and available for Q&A. For those of you participating via conference call, the accompanying slides can be accessed by going to the Events section of the Investors page of our website, investors.alnylam.com/events. During today's call as outlined in slide two, John will provide some introductory remarks and general context, Barry will provide an update on our commercial and medical affairs progress, Akshay will review recent clinical and preclinical updates, Jeff will review our financials and Yvonne will provide a brief summary of upcoming milestones before opening the call for your questions. I would like to remind you that this call will contain remarks concerning Alnylam's future expectations, plans and prospects, which constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent quarterly report on file with the SEC. In addition, any forward-looking statements represent our view only as of the date of this recording. It should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update such statements. With that, I'd like to turn the call over to John. Thanks, Christine, and thank you, everyone, for joining the call today. Let me start by expressing Alnylam's support for Black Lives Matter and our support for the efforts to end systemic racism in our country. At Alnylam, we stand against all forms of discrimination; and in our core, we believe, in justice, equity and inclusion. We stand in support of peaceful protest aimed at achieving real and sustainable change. Enough is enough, and it's time to finally cure the refractory scourge of hate. I'd also like to comment briefly on the Trump administration's recent announcement on drug prices. While we fully support the need to reduce or even eliminate patient out-of-pocket costs for prescription drugs, the administration's proposal to potentially introduce a so-called Most Favored Nation executive order is both unfortunate and misguided. Importing foreign price controls will harm American innovation and hurt our patients. Even if this executive order is finalized, we don't believe it will stand. With that, let's now turn to our business. As all of you know, the COVID-19 pandemic remains dynamic, uncertain and unpredictable. That said, we continue to view the situation in the same framework we discussed last quarter: a pandemic phase in Q2, a recovery phase in Q3 and a new normal starting in Q4. While the pandemic continues or even worsens in many states in the U.S., we believe Alnylam's business is benefiting from our broad global presence. In spite of the ebbs and flows, we are seeing healthcare systems now remaining open, and we don't currently expect a repeat shutdown of healthcare systems like what was seen in Q2, especially in the April-May time frame. Our confidence in the second half is reflected in an upward revision in our ONPATTRO revenue guidance range. Overall, we're really proud of our field teams around the world and their ability to adapt quickly and safely to meet the needs of patients, embodying our challenge accepted mentality. We are extremely pleased with global ONPATTRO and GIVLAARI top line performance in Q2, which Barry will elaborate on shortly. We're also proud of the significant progress we made across our pipeline in the quarter, as Akshay will discuss. Another highlight for the quarter was our landmark strategic financing collaboration and inclisiran royalty monetization we completed with Blackstone Life Sciences worth up to $2 billion. We believe this collaboration secures our bridge toward a self-sustainable financial profile without the need for any future equity financings. Now before I share my before I close before I share my closing remarks, I want to take a moment to acknowledge the news we announced earlier this morning about Barry Greene's planned departure from Alnylam at the end of the quarter. Barry and I have been working side by side for over 20 years, first at Millennium and then for 17 years at Alnylam. And I know that I speak for everyone at Alnylam in thanking Barry for his exceptional contributions and dedication to the company. We all owe him tremendous gratitude for his outstanding leadership and track record that have contributed to the delivery of RNAi therapeutics as a whole new class of medicines for patients. I have no doubt Barry will continue to be a highly impactful leader in the life sciences. I'm grateful for his agreement to consult with Alnylam as needed for a two-year period, and I wish him all the very best in his next endeavors. We are also very pleased to share that Yvonne Greenstreet, our current Chief Operating Officer, will step into the expanded role of President and Chief Operating Officer on October 1. We believe Yvonne is uniquely suited for this opportunity given her strong command of our business, strategic leadership and proven ability to drive results. We are initiating a search for a Chief Commercial Officer. And during the search, we anticipate no impact to our ongoing commercial execution. Please join me in wishing Barry well as he pursues the next chapter of a remarkable career and congratulating Yvonne on her expanded role at Alnylam. I'd like to finish with my perspective on the big picture for the company. We continue to lead the advancement of RNAi therapeutics as a whole new class of medicines, and we remain on track to achieve and exceed our Alnylam 2020 goals, exiting 2020 as a multiproduct global commercial company with a deep clinical pipeline for future growth and a robust and organic product engine for sustainable innovation. Without a doubt, we're excited for the promising future that Alnylam is poised to deliver as a top-tier biopharmaceutical company focused on advancing medicines with transformative potential for patients around the world. With that, I will now turn the call over to Barry for one last time, Barry, to review our commercial progress and medical affairs activities in more detail. Barry, take it away. Thanks, John, and good morning, everyone. Before I provide the quarterly highlights, I'd like to make some brief remarks about my planned transition from Alnylam. First, congratulations again to Yvonne Greenstreet. She is a remarkable person and well deserves the President and COO role. I know that Yvonne will make sure that Alnylam continues to be a company doing the right things and focusing on patients, and I'm counting on it. As for me, it's been a tremendous privilege to serve as President of Alnylam for such a long period of time. I'm very proud of what we've been able to accomplish during my 17 years, and we built a global fully integrated multiproduct company that is recognized for excellence in R&D and recently for our commercial strength as well. My decision to transition is based on the desire to pursue new leadership opportunity in the next chapter of my career. I'm fully confident Alnylam will achieve its ambitious goals with quality and excellence with the great team we have in place. I'll continue to support Alnylam throughout this transition and have no doubt about the company's future prospects as a top-tier biopharmaceutical company. So let's now review our. For ONPATTRO, we achieved $66.5 million in global net product revenues. As of June 30, over 1,050 patients were on commercial ONPATTRO treatment worldwide, representing an increase of over 100 patients from end of Q1, a very impressive accomplishment in the height of the global pandemic during Q2. Let's start with some more color on the U.S. As anticipated, the COVID-19 pandemic had impact on our business in the second quarter, with patient demand decreasing due to reduced adherence as some patients skip doses or experience dose delays while moving to new care sites. Also as anticipated, we saw the pace of new patient initiating therapy slow in the U.s. during the quarter due to reduced genetic testing, diagnosis and patient flow through the healthcare systems. Finally, our U.S. business was also impacted by inventory destocking and an increase in cost in the second quarter. Jeff will provide more color on these details later in the call. While our focus today is on Q2, as we enter Q3, we're now seeing what looks like a healthy return of genetic testing and patient flow through the U.S. healthcare system even in states where COVID-19 cases are rising. And in fact, our July, on our last numbers are near the January numbers we saw earlier in the year. A really good sign. In the second quarter, we continue to see great progress in new prescribers. For the second quarter, 40% of submitted start forms came from new writers with an equal mix of neurologists and cardiologists. In the U.S., we saw continued concomitant use of ONPATTRO with TTR stabilizers in the quarter. We believe this trend will continue to grow as physicians see progression of polyneuropathy on stabilizers and treat the different manifestations of hATTR amyloidosis. Now turning to the rest of the world. We made very positive progress with ONPATTRO in the second quarter. Rest of world sales for ONPATTRO were $34.2 million and relative to the U.S. benefited from continued geographic expansions with launches in Spain, Italy and other countries. In addition, we saw relative strength in our ex U.S. markets between Europe and Japan for their management of the pandemic. As John noted, this is a nice validation of the decision to build a global, fully integrated business. With today's announcement of achieving pricing and reimbursement agreement in France, we're pleased to report that access has been secured in all priority markets in Western Europe. Notably, our team has secured pricing and reimbursement approval in all major European markets in under two years post-approval by the EMA. This is a much faster rate than most orphan medicines are able to achieve. Japan was again a country of strength for ONPATTRO. Japan has now become our second-largest country after the U.S. for our ONPATTRO revenue, and we expect continued growth in new patient discussion on stabilizer therapy. On the medical care side, our team remains committed to addressing the challenge of raising disease awareness and improving diagnosis of hATTR amyloidosis, including with Alnylam Act, our third-party genetic screening initiative in the U.S., Canada and Brazil. As of July, over 27,000 samples have been submitted, out of which over 1,600 have tested positive for pathogenic TTR mutation, which is tracking at a historic 6% to 8% positivity rate. These numbers show the testing slowdown in Q2 we mentioned on our last earnings call. The good news is that, those numbers have picked up to near January levels. Moving on to GIVLAARI. We are really pleased with the progress in our launch, most of which was done virtually. We achieved $11 million in global net product revenues. We received over 85 start forms in the U.S. with over 100 patients globally on commercial treatment from launch through June 30. As we have now begun to open ex U.S. territories and also because currently 25% to 30% of U.S. patients come from outside the start form channel, we'll discontinue providing start form metrics in future quarters as we did last year for ONPATTRO. In the U.S., we observed a broad prescriber mix, including hepatologists, gastroenterologists and other specialties, both in preferred centers of excellence and in the community. Of note, 76% of our Q2 starts were from new writers. Our progress with value-based agreements has been extremely strong with seven VBAs completed with U.S. payers, and we now have confirmed access for over 75% of covered U.S. lives across commercial, Medicaid and other government payers. We've not experienced any care to date, pleased to see plans adopt medical policies, not more restrictive than our labeled indication. ASMR III saw strong initial performance as well with the successful and as noted virtual launch in Germany as well as named patient sales in other countries, including French cohort ATU program. We've been positively encouraged by the responsiveness of European payers despite the COVID-19 pandemic. Of note, GIVLAARI received an improvement of medical benefit or ASMR score of two in France, concluding that GIVLAARI offers significant additional therapeutic value. This is an enormous accomplishment. For context, only two new commercial medicines were granted with an ASMR rating of two for 2019. Our medical affairs team is also focused on improving awareness and diagnosis with AHP. Through Alnylam Act, we can report 937 test submitted and 92 patients with positive AHP mutations as of mid-July, showing continued 10% positivity rate. A notable diagnosis trend emerging is the robust use of urinary PPG test informed diagnosis, and we expect patient identification efforts will be meaningfully enhanced by this nongenetic testing method. Of course, we're now also preparing for the potential launch of lumasiran later this year. Importantly, we'll be leveraging our existing commercial infrastructure for this launch with small additions of resources for field-based teams. When we gain approval, we'll let specific commercialization support medicine therapeutic expected to market. In conclusion, the second quarter was challenging due to the pandemic particularly in the United States, but was much better than the downside case we anticipated as we entered Q2. The credit goes to our teams around the world who face the obstacles head on to deliver the important medicines to our patients. With that, I'll now turn the call over to Akshay to review our recent R&D and pipeline progress. Akshay? Good morning, everyone, and thank you, Barry. I should say thank you, Barry, for guiding me, for helping build our company and, most of all, for working so tirelessly to help all the patients we seek to serve. So with that, I'll start with our efforts in ATTR amyloidosis where we're advancing our two product candidates: patisiran and vutrisiran. As ONPATTRO is currently approved in multiple markets around the world to treat polyneuropathy associated with hATTR amyloidosis, we're committed to expanding the product's label to include the treatment of cardiomyopathy in both hereditary and wild-type ATTR amyloidosis patients. To this end, we continue to enroll patients in APOLLO-B and continue to expect completion of enrollment in 2021. We've seen enrollment pick up over the last month as clinical sites start to open up around the world. In addition, we're also advancing vutrisiran, an investigational RNAi therapeutic delivered by quarterly subcutaneous injection that's also in development for the treatment of ATTR amyloidosis. Here, we're conducting two Phase III studies. The first is HELIOS-A, which is evaluating vutrisiran in hATTR amyloidosis patients with polyneuropathy. Enrollment is complete in HELIOS-A, and we remain on track to report top line results early next year. The second Phase III study of vutrisiran is HELIOS-B, which is being conducted in in inherited and wild-type ATTR amyloidosis patients with cardiomyopathy. As with APOLLO-B, site activation enrollment in HELIOS-B are now picking up. If HELIOS-B is positive, it could allow for vutrisiran's entry into the very large wild-type ATTR amyloidosis market opportunity with the product label that includes cardiovascular outcomes. Let's move to GIVLAARI, which is approved in the U.S., EU and now in Brazil to treat acute hepatic porphyria in adults. Of course, the highlight of GIVLAARI in the recent period was our Brazilian approval, and we're continuing our geographic expansion for this product with MAA submitted in Switzerland and Israel and plans for submission in Japan in the coming months. During the second quarter, we also presented a new 12-month interim data from the ENVISION Phase III study, demonstrating sustained efficacy and acceptable safety through 12 months of treatment, with evidence for potentially improved efficacy over time. In addition, we're proud to have published pivotal results from the ENVISION Phase III study in The New England Journal of Medicine. This is our ninth paper on RNAi therapeutics published in the journal. I'll now turn to recent progress with lumasiran, an investigational RNAi therapeutic that we're developing for the treatment of primary hyperoxaluria type 1, or PH1. At the ERA-EDTA meeting in June, we reported the full set of positive results from ILLUMINATE-A, which demonstrated that lumasiran significantly reduced urinary oxalate levels, the cause of progressive kidney failure in PH1. In addition, lumasiran showed an encouraging safety profile. Our overall lumasiran program also includes our ILLUMINATE-B study in pediatric patients under six years of age. Enrollment is complete, and we remain on track to report top line results soon in mid-2020. The ILLUMINATE-C study in severe PH1 continues to enroll and has been proceeding well even during the pandemic. We completed our NDA and MAA submissions in the second quarter. The FDA granted priority review for the NDA and has set an action date of December 3, 2020. EMA has granted accelerated assessment of the MAA. As you know, we have two additional late-stage programs that are in development with partners. This includes inclisiran in the development in development for hypercholesterolemia partnered with Novartis, which is currently under review for approval in the U.S. and EU. Both NDA and MAA filings have been accepted, and Novartis expects initial approval in the U.S. in late 2020. Novartis has indicated that they remain on track for approval this year with a December action date in the U.S. Our late-stage pipeline also includes fitusiran in development for hemophilia A or B with or without inhibitors, partnered with Sanofi. Sanofi has recently disclosed that two of the three ATLAS Phase III studies have completed enrollment and that they remain on track to report top line ATLAS Phase III data in the first half of 2021. Sanofi also presented new positive results from an interim analysis of the Phase II OLE study of fitusiran, showing impressive reductions in the annualized bleeding rate with encouraging safety. Now in addition to our late-stage clinical programs, we believe we've also been making great progress with our early and mid-stage programs. The highlights of the quarter was the positive top line results from our ALN-AGT Phase I study in patients with hypertension, specifically ALN-AGT demonstrated an over 90% knockdown of angiotensinogen and a greater than 10 millimeters mercury lowering systolic blood pressure with the durability that's caused a quarterly or even less frequent subcutaneous dosing regimen. We're also encouraged by the tolerability profile for ALN-AGT. We now look forward to presenting more complete data from the ongoing Phase I study at a scientific meeting in the second half, assuming abstract acceptance. We're very excited about the potential for ALN-AGT to reimagine the treatment of hypertension with tonic-controlled blood pressure that we believe could result in important benefit for patients. Our next clinical program is ALN-HSD, an investigational RNAi therapeutic for the treatment of NASH, for which we recently filed a CTA. This program is being advanced in collaboration with Regeneron. We're also making strong progress on our many RNAi therapeutic opportunities beyond the liver. For our COVID-19 RNAi therapeutic collaboration with Vir, we selected a development candidate, ALN-COV or VIR-2703, with potent and highly cross-reactive activity toward SARS-CoV-2, the virus that causes COVID-19. We continue to expect an IND filing around year-end 2020. We're also pleased to announce today that Regeneron has elected to opt-in to the ALN-APP program. We aim to get an IND filed for ALN-APP in mid-2021, and this is expected to be our first CNS program to enter clinical development. And with that, let me now turn it over to Jeff to review our financial results. Jeff? Thanks, Akshay, and good morning, everyone. I'm pleased to be presenting Alnylam's Q2 2020 results. As Barry has already highlighted, it was a very strong quarter of commercial execution, with outstanding results for both ONPATTRO and GIVLAARI. Turning to our results first for ONPATTRO, generated $66.5 million in global net ONPATTRO revenue for the quarter, which was impacted by the pandemic, particularly in the U.S., with global growth being flat versus the first quarter of 2020 and a 74% increase compared with Q2 2019. U.S. growth decreased 13% during the quarter compared with Q1 and was primarily impacted by the following: a 4% decrease in demand from reduced patient adherence due to the COVID-19 pandemic, as Barry previously mentioned; an 8% reduction due to inventory destocking during the quarter with pending inventory now at 1.5 weeks in the distribution channel at the end of Q2; and a 1% decrease due to a modest increase in gross to net deductions in the quarter. We continue to expect gross to net deductions will remain in the mid-20s globally for ONPATTRO in 2020. In our international markets, performance was very strong in spite of the pandemic, with growth of 16% versus Q1. Growth in Europe was highlighted by strength in recently launched markets in Italy and Spain. While in Asia, growth in Japan remains robust, with Japan now representing our second-largest market for ONPATTRO based on dollar sales, as Barry mentioned. First time this quarter, the contribution of our international markets to global ONPATTRO sales exceeded the U.S. contribution. We are pleased to have a strong and global brand, which we believe is beneficial to long-term growth. Turning to our results for GIVLAARI. We had a strong second quarter, generating $11 million in global net revenue in the quarter, representing over 100% growth compared to the first quarter. This growth was driven by ongoing success of the U.S. launch where we did not experience reductions in patient adherence at the same level as ONPATTRO as well as an additional contribution from our international markets with a successful launch in Germany and named patient sales in other countries, including France. Our combined product sales for ONPATTRO and GIVLAARI were $77.5 million for the quarter, representing 6% growth versus Q1, a strong result given the challenges associated with COVID-19 in the quarter. Turning now to a summary of our full P&L results for the quarter. Net revenue from collaborations for the second quarter was $26.4 million, a significant increase from last year primarily due to revenue recognized from our Regeneron and Vir collaborations. Gross margin as a percentage of total revenue was 81% for the quarter, down from 90% in Q2 2019 primarily due to the current utilization of ONPATTRO full cost inventory. Last year benefited from 0 cost ONPATTRO inventory as well as having a higher proportion of sales in the second quarter of 2020 coming from lower-margin international markets and a write-off of ONPATTRO inventory at our contract manufacturer. Our R&D expenses decreased on a non-GAAP basis in the second quarter of 2020 compared to the same period in the prior year primarily due to nonrecurring expenses in 2019 from license fees related to the execution of our collaboration agreement with Regeneron as well as a decrease in expenses associated with material manufactured for clinical trials. Conversely, SG&A expenses increased modestly on a non-GAAP basis in the second quarter of 2020 compared to the same period in the prior year primarily due to increased investment in commercial and medical affairs activity to support the ongoing launches of ONPATTRO and GIVLAARI and initial launch preparation activities for lumasiran. Importantly, our non-GAAP operating loss for the second quarter decreased by approximately $40 million compared with the same period in 2019 driven by a combination of strong top line growth and very moderate growth in operating expenses. We remain confident that 2019 represents our peak non-GAAP operating loss year as we expect the trend of strong top line growth and moderate growth in operating expenses will continue for the balance of the year. We ended the quarter with cash and investments of $1.95 billion, which includes $600 million in proceeds received in the second quarter from the partial sale of future inclisiran royalties and issuance of common stock to Blackstone. Finally, turning to our financial guidance. We believe our results for the second quarter demonstrate the strength of our commercial teams in challenging circumstances. As a result of the strong commercial performance for ONPATTRO that exceeded our initial expectations back in the earlier phase of the pandemic in May, we are further revising our full year revenue guidance for ONPATTRO, with an increase in the midpoint of our guidance as we narrow the range from $270 million to $300 million to $280 million to $300 million. Guidance range for combined non-GAAP R&D and SG&A expenses as well as our guidance for net revenue from collaborations remain unchanged. Please note that we have revised the midpoint of our GAAP combined R&D and SG&A operating expense guidance downward by $25 million, reflecting a reduction in expected stock-based compensation during the year. Regarding cash, we believe our strategic financing collaboration with Blackstone, adding up to $2 billion in cash, secures Alnylam's bridge toward a self-sustainable financial profile without the need for future equity financings. And with that, I'll now turn the call over to Yvonne to review our goals for the remainder of the year. Yvonne? Thanks, Jeff, and hello, everyone. Looking ahead to the second half of 2020, we have a number of important milestones lined up. Of course, we plan to continue our global commercialization of both ONPATTRO and GIVLAARI, and we're looking forward to our GIVLAARI launch in Brazil and an upcoming NDA filing for GIVLAARI in Japan. We're also expecting two additional regulatory approvals by the end of the year for lumasiran and inclisiran. We plan to continue enrollment in our ATTR cardiomyopathy studies, specifically APOLLO-B with patisiran and HELIOS-B with vutrisiran. With lumasiran, we're on track to share top line results of the ILLUMINATE-B Phase III study in mid-2020. And of course, we'll also continue advancing the rest of our pipeline as well as exciting preclinical efforts, and we'll highlight these milestones throughout the year as they occur. Among these will be our presentation of additional clinical results from the ongoing Phase I trial of ALN-AGT in hypertension program we're very excited about. We also plan to initiate a Phase I trial of ALN-HSD for NASH, having now filed the CTA for that program. And our partner, Regeneron, plans to initiate a Phase I study of cemdisiran in combination with pozelimab, having now filed the CTA for that study. We also hope that you'll join us for our remaining RNAi roundtables focused on lumasiran, givosiran and our TTR programs later in August and September. Let me now turn it back to Christine to coordinate our Q&A session. Christine? Thank you, Yvonne. I just wanted to quickly acknowledge, we found issue with Barry's prepared remarks. There are some storms that are rolling through his area that impacted the audio quality, and we will plan to have Barry rerecord his remarks for the replay of this call. | 1 |
| Good morning and welcome to the Kroger Co. second-quarter 2020 earnings conference call. [Operator instructions] I would now like to turn the conference over to Rebekah Manis, director of investor relations. Please go ahead. Thank you Gary. Good morning and thank you for joining us. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings that Kroger assumes no obligation to update that information. Our second-quarter press release and our prepared remarks from this conference call will be available on our website at ir.kroger.com. This is obviously an unprecedented time, and we are taking the additional step of providing more details on current business trends this quarter, so our prepared remarks may run a little longer than normal. After our prepared remarks, we look forward to taking your questions. Thank you Rebekah. Good morning everyone, and thank you for joining us. With me today to review Kroger's second-quarter 2020 results is chief financial officer, Gary Millerchip. Each day, I'm inspired by the work our incredible associates do to bring to life our purpose, to feed the human spirit. I am proud of our dedicated associates who are serving our customers when they need us most. Our top priority is to provide a safe environment for associates and customers, and as the pandemic continues, we know that Kroger will continue to rise to meet the challenge. Six months into the pandemic, while there is still much we cannot predict, we still -- we have a greater clarity in many areas across the business. Since March, we have invested more than $1 billion to both reward our associates and to safeguard them and our customers through implementation of dozens of safety measures. The company's total COVID-19 incident rate continues to track meaningfully below the rate in surrounding communities where we operate. We have learned and continue to learn a lot while keeping our stores and supply chain open and serving America during the pandemic. We continue to play a key role in addressing the critical need to expand COVID-19 testing. The Kroger Health team facilitated more than 150,000 COVID-19 tests at walk-up and drive-thru locations across the country. Recently, Kroger Health announced the expansion of COVID-19 testing offerings at more than 222 little clinic locations. As the nation prepares to enter the flu season, testing will become even more critical to help diagnose COVID-19 amid potential similar symptoms. We announced earlier this week a comprehensive flu shot program designed to help Americans get their recommended vaccines during the COVID-19 pandemic. Despite the pandemic-related challenges, we delivered extremely strong results in the second quarter. Customers are at the center of everything we do, and as a result, we are growing market share. Kroger's strong digital business is a key contributor to this growth as the investments made to expand our digital ecosystem are resonating with customers. Our results continue to show that Kroger is a trusted brand, and our customers choose to shop with us because they value the product quality and freshness, convenience and digital offerings that we provide. While we delayed certain cost-saving initiatives in the first quarter, as of the close of the second quarter, we are back on pace to achieve them. I continue to be proud of the way our associates have adapted and adopted to the new ways of working during the pandemic to continue to achieve strong results. We are more certain than ever that the strategic choices and investments made through Restock Kroger to execute against our competitive moats, fresh, our brand, personalization and seamless, have positioned us to meet the moment. We are also positioned to deliver 2020 and beyond for our customers, associates and shareholders as we believe a number of impacts of COVID will be structural and lasting. Our data insights show customers are rediscovering their passion for cooking at home and have an aspiration to eat more healthy foods as a result of COVID. When we talk to our customers, they tell us they plan to continue to prepare and eat more meals at home. As children return to school, many families are telling us they plan to make breakfast in the morning and prepare lunch for their children to take school. As we talk to other companies across America, we believe return to work will look very different with many employees working part of the week from home. And finally, while the full economic impact of COVID-19 is yet understood, our data shows that during the periods of lower economic activity, we see a structural shift from food consumed away from home to food consumed at home. All of these factors combined lead us to believe there will be more meals eaten at home or prepared at home for the foreseeable future. Now, I'd like to walk you through some examples of how our competitive moats have positioned us for growth in the short and long term. Even before the pandemic, our digital business had become a tailwind. The pandemic certainly has accelerated customer preference for seamless offerings. Our customers are increasingly turning to our e-commerce solutions for their grocery and household essential needs. Many of our customers are ordering groceries online for the first time as a result of COVID-19, and the majority of them tell us they plan to continue to do so in the future. Kroger began investing in digital several years ago to build a seamless ecosystem that would deliver anything, anytime, anywhere. As a result, we have over 2,100 pickup locations and 2,400 delivery locations, reaching 98% of our customers with a seamless customer experience that combines the best of our physical stores with digital. Kroger was the first to integrate pickup and delivery into one seamless experience. These investments were especially timely as customer adoption of pickup and delivery has grown significantly during the pandemic. Kroger's digital ecosystem continues to expand and customers are increasingly engaging with us. For example, Home Chef is growing incredibly fast, no doubt accelerated by the food at home trend that we believe is a structural change. We also announced that Kroger Ship will expand to offer an extended ship-to-home assortment through a marketplace offering of third-party sellers. We will continue to expand our ecosystem over time. The Kroger technology and digital team continues to create innovative experiences that are changing the way we serve customers across America and was recognized for the third consecutive year as the best place to work in IT by Computerworld. This recognition is awarded to companies that have innovative industry-leading workspaces offering a great customer associate experience. As a result of the pandemic, we continue to see a slow return to normal from the shutdown period resulting in fewer customer visits but increased basket size. Customers across the country are still staying home and cooking at home that is now part of their new routine. This makes our leadership position in fresh an even more important sales driver for Kroger. Customers rank our fresh departments higher than all of our big box competitors, and our fresh departments generated strong identical sales in the second quarter and gained market share. Our brands is also a key competitive moat for Kroger. We continue to meet the diverse needs of our customers with significant growth across the three largest brands. Our customers are eating more at home and we are seeing some customer segments trade up to the larger pack sizes as well as more premium quality foods and natural and organic foods. Our larger-sized big pack platform is up well over 50%. Private selection is up over 17% and Simple Truth is up over 20% in the second quarter. Our brands continues to tap into emerging trends and evolving customer needs, delivering new flavors and innovative new items like the new plant-based Emerge grinds and patties which launched in late 2019. A recent third-party industry study reconfirmed that Simple Truth is the most-loved natural and organic brand in the U.S. Simple Truth significantly outperformed competitors on strength of brand which is a combination of awareness, willingness to recommend and strength as the driver of store selection. In continuing to exceed our customers' expectations of value and quality while also consistently delivering innovative new items our customers love, our brands remain one of our most powerful competitive advantages. Finally, personalization and data remains one of Kroger's key and core competitive moats. We use our data to understand what is most important to our customers and continued to offer promotions throughout the quarter. And we think it is an important component to continue to support as the pandemic continues and government stimulus benefits have expired. Many of our customers are experiencing some form of financial hardship that we expect to impact discretionary purchases and eating out. This is one of the unique capabilities of the Kroger ecosystem we can deliver for both customers on a budget and customers who are trading up to premium products and/or larger sizes. Turning now to partnerships. While COVID-19 has not necessarily changed how we think about our approach to e-commerce, it has accelerated our thinking about how our full evolution of seamless strategy, inclusive of Ocado. Ocado is a strategic partner of choice, delivering innovation and best-in-class experience and economic advantage through efficient fulfillment. We are confident the future of our ecosystem will incorporate a mix of capabilities and facilities ranging in sizes, and our network will flex as demand matures and the optionality will allow us to fulfill same-day or next-day delivery or pickup and customers or store replenishment. Ocado's model incorporates state-of-the-art automation and AI to expand Kroger's products to a larger footprint. And our model to deliver to customers is significantly less costly than our existing model. We are on track to open the first two sites in the spring of 2021. Developed talent is a driver of Restock Kroger, and we work extremely hard to ensure that we have the right talent, teams and structure and the right focus areas in our core supermarket business and our alternative profit businesses. We are focused on both developing, training and promoting internal talent and hiring external executives, both food industry and technology which together drives our retail supermarket business and all of our businesses. Kroger has been investing to raise wages of our frontline associates for the last several years. As part of Restock Kroger announced in 2017, over the period of 2018 to 2020, Kroger will have invested an incremental $800 million in associate wage increases, and that is $300 million more than the original plan. As a result of this continuing investment, Kroger has increased its average hourly rate to over $15 per hour. And with our comprehensive and best-in-class benefits including healthcare, paid time-off and retirement plans, our average hourly rate is over $20. As the largest traditional grocery retailer in America, Kroger is committed to being a force of good in the communities we serve. Our purpose to feed the human spirit continues to guide how we operate our business, care for our communities and deliver value to all of our stakeholders. Last month, we released our 2020 ESG report, highlighting progress toward our sustainability goals. We are committed to continuing to integrate ESG metrics into our business strategy, driving shared value for our associates, customers, communities and company. We recently made the decision to contribute an additional $20 million split evenly between The Kroger Co. Foundation and the Zero Hunger Zero Waste Foundation. We also added $5 million to a fund created to support the advancement of racial equity and justice. We believe that it is vitally important to get resources to our communities as they continue to face hardships related to the pandemic, the economic downturn and racial injustice. Under Restock Kroger, we have made significant investments to establish a seamless digital ecosystem, strengthen our brands and our personalization capabilities and to enhance product freshness and quality. These investments, combined with how our associates have responded to the pandemic and customers eating more meals at home, give us confidence that Kroger's performance in both 2020 and 2021 will be even stronger than previously anticipated. I will now turn it over to Gary for more details into the quarter financials. Gary? Thanks Rodney, and good morning everyone. Before getting into our business results, I wanted to echo Rodney's comments from earlier and say how extremely proud I am of our associates for continuing to serve our customers and communities throughout the pandemic. We remain committed to investing to ensure a safe environment for our associates and customers, and we will also continue to use our customer insights to invest in delivering greater value for customers in ways that are most relevant today and that build future loyalty. Results for the second quarter were strong and reinforce the strategic investments we have made over the last several years as part of Restock Kroger. The quarter turned out much better than we previously expected. This was due to several factors including stronger sales results and disciplined balance between cost savings and investments while also managing cost inflation volatility in key fresh categories. Additionally, fuel performed better than predicted, and we were very pleased with our alternative profit results which rebounded from COVID-19 impacts more quickly than anticipated. Now, I'd like to provide further detail on second-quarter performance. We delivered an adjusted EPS of $0.73 per diluted share, up 66% compared to the same quarter last year. Kroger reported identical sales without fuel of 14.6% during the second quarter. Sales momentum continued from the first quarter with identical sales without fuel in June and July trending in the mid-teens. During our final period of the quarter which runs from mid-July to mid-August, identical sales without fuel were 12.5% as we saw reduced government stimulus and SNAP funding and lower back-to-school activity. Digital sales grew 127% and contributing 4.4% to identical sales without fuel. New customer engagement and with our pickup and delivery services continued to grow and we continue to invest in the customer experience. This included offering fee-free pickup to provide more value for our customers in ways that are most relevant at this time. Our digital sales growth was profitable on an incremental basis, and we were pleased with the progress we made to improve profitability by reducing the cost to fulfill a pickup order during the quarter. We see a clear path to further improve digital profitability by leveraging our personalization tools to improve sales mix, continuing to reduce cost to fulfill an order via process improvements and automation and accelerating growth in media revenue generated from digital sales. Adjusted FIFO operating profit for the second quarter was $894 million, up 43% compared to the second quarter of 2019. We were pleased with the overall pass-through rate achieved from the elevated sales in the quarter which including the impact of digital growth and incremental costs associated with COVID-19, was approximately 10%. COVID-related cost investments in associate depreciation, cleaning, safety and supply chain totaled approximately $250 million in the quarter. Gross margin was 22.8% of sales for the second quarter. The FIFO gross margin rate excluding fuel, increased 5 basis points primarily driven by sourcing efficiencies, sales leverage related to shrink, transportation and advertising costs plus growth in alternative profit streams. This was partially offset by price investments as we continued to invest in delivering greater value for customers and mix changes from lower relative sales in higher gross margin categories such as deli bakery. The OG&A rate excluding fuel and adjustment items, decreased 61 basis points due to sales leverage and execution of Restock Kroger initiatives partially offset by ongoing COVID-19 related costs mentioned earlier to protect the health and safety of our customers and associates. Rent and depreciation excluding fuel, decreased 27 basis points due to sales leverage. We were very pleased with the progress on our Restock Kroger savings initiatives in the quarter and now expect to achieve the targeted $1 billion of savings in 2020. Fuel remains an important part of our strategy to drive customer loyalty. Compared to the first quarter and consistent with market trends, the decline in gallons slowed to around 15% in the second quarter. We remain well positioned with our markets due to our fuel procurement practices and market-leading reward program. The average retail price of fuel was $2.14 this quarter versus $2.71 in the same quarter last year. Our cents per gallon fuel margin in the second quarter was $0.37 compared to $0.35 in the same quarter last year. While fuel operating profit was $30 million lower than the same quarter last year, this was better than expected. For the remainder of 2020, we expect fuel profitability will continue to be a headwind compared to prior year as we cycle margins from 2019 and gallons continue to be impacted by COVID. Kroger's alternative profit model is built on a platform of leveraging supermarket traffic and data, with media and Kroger Personal Finance representing the largest contributors to growth in 2020. Thanks to our team's responsiveness to the challenges COVID has presented to our alternative profits portfolio, these businesses rebounded strongly in the second quarter, and we now expect growth approaching $100 million for the fiscal year 2020. We continue to believe alternative profit will be a major accelerator of our model in the future, and COVID-19 has not changed the long-term profit expectations previously shared as part of Restock Kroger. Kroger precision marketing drove tremendous acceleration in our media business in the second quarter. On the strength of growth in digital sales, digital customer engagement and new inventory, revenue growth doubled compared to the first quarter. In-store media also bounced back as stay-at-home orders were lifted in many of the communities we serve. Kroger Personal Finance experienced higher transactions in the second quarter compared to the first quarter as customer activity improved in gift cards, lottery and money services. While trends at KPF are improving, we continue to expect KPF profit will be lower than our original expectations for 2020 due to COVID-19. We continue to invest in our associates as a key part of Restock Kroger in a variety of ways including investments in wages, training and development. As you know, for the last decade or more, Kroger has sought opportunities to address the funding challenges facing the pension plans in which our associates participate. We believe challenges related to pension funding can be mitigated if plans are reviewed and addressed over time. Consistent with this effort, last month, we announced a tentative agreement to improve security of future retirement benefits of over 33,000 Kroger family of company associates across 20 local UFCW unions with an investment of nearly $1 billion. Ratification of this agreement is still expected to occur in the third quarter of 2020. We ratified new labor agreements with the UFCW covering associates in Roanoke during the second quarter. We are currently negotiating with the UFCW for contracts covering store associates in Las Vegas, Little Rock, Houston, Dallas and Charleston, West Virginia. Looking ahead, toward the end of this year, we will be negotiating with the UFCW for Fry's stores associates in Arizona. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable healthcare and retirement benefits for our associates. We strive to make our overall benefit package relevant to today's associates. Our financial results continue to be pressured by healthcare and pension costs which some of our competitors do not face. We continue to communicate with our local unions and the international unions which represent many of our associates on the importance of growing our business in a profitable way which will help us to create more jobs and career opportunities and enhance job security for our associates. Turning now to financial strategy. Kroger's financial model has proven to be resilient throughout the economic cycle. We continue to generate strong free cash flow and maintain strong liquidity. We are committed to investing in the business to drive profitable growth, maintaining our investment-grade debt rating and returning excess free cash to investors via share repurchases and a growing dividend over time. We remain confident in our business model and our ability to achieve consistently attractive total shareholder returns. We will provide more color on our future approach to capital allocation and the use of excess cash during our March 2021 investor day. In 2020, we are being disciplined in how we deploy capital, and all aspects of our capital plan are being evaluated to make sure that our investments will deliver strong returns and position Kroger for long-term success post COVID-19. We now expect total capital expenditure to range between $3 billion and $3.4 billion in 2020. We have widened the range of our guidance due to the uncertainty on timing of when spend will occur because of COVID-19. Kroger's net total debt to adjusted EBITDA ratio is 1.7 compared to 2.46 a year ago. This is below our target range of 2.3 to 2.5. Kroger held temporary cash investments of approximately $2.4 billion as of the end of the quarter reflecting improvements in operating performance, significant improvements in working capital and delayed tax payments as a result of the CARES Act. We expect working capital to improve for the year although not to the level experienced year-to-date which is inflated by sales growth due to COVID-19. During the quarter, Kroger repurchased $211 million of shares under its $1 billion board authorization announced on November 5, 2019. On September 11, 2020, the board of directors authorized a new $1 billion share repurchase program, replacing the prior authorization. In June, Kroger increased the dividend by 13%, marking the 14th consecutive year of dividend increases. Turning now to guidance for the remainder of 2020. As we shared last quarter, the COVID-19 pandemic has changed the outlook for food retail, and we continued to monitor, evaluate and adjust our plans to address the impact to our business. While there are clearly still many unknowns, as Rodney shared in his opening comments, we now have greater clarity in many areas of our business and the drivers of food at home consumption. As a result of our strong performance in the first half of the year, the expectation of sustained trends in food-at-home consumption and confidence in our ability to execute against the Restock Kroger strategy, we are updating our full-year 2020 guidance. For the full-year 2020, we expect total identical sales without fuel to exceed 13%, and we expect to achieve adjusted EPS growth of approximately 45% to 50%. We are providing a wider range on guidance than we would normally provide at this point in the year to account for the variety of outcomes that could materialize as a result of the pandemic. In the second half of 2020, we expect identical sales excluding fuel, to continue at elevated levels, although tapering from the level we've experienced so far this year. Our guidance contemplates continued investments in the customer and ongoing COVID-19 related costs to protect the safety of our customers and associates, balanced with continued execution of cost-saving initiatives and growth in alternative profits. We expect fuel profitability will be a headwind for the remainder of 2020. Finally, relative to delivering on our total shareholder return growth targets, as shared at our November 2019 investor day, these factors also lead us to believe that our 2021 business results will be higher than we would have expected prior to the COVID-19 pandemic. As the operating environment continues to evolve, we will be transparent and communicate any important changes that could impact our outlook. I'll now turn it back to Rodney. Thanks Gary. We provided specific guidance to help you understand how we see the business today. While there are still a lot of uncertainties, we are confident in our team's ability to navigate through this. We are laser-focused on winning with the customer, and our true measure of success internally will be growing market share sustainably over time. As Rebekah said earlier, we have scheduled a call on October 27. We will provide a business update relative to our November 2019 business commitments as well as our overall ESG commitments. We value the impact of an in-person meeting with you and have made the decision to reschedule the timing of our traditional investor day to spring of 2021. We remain incredibly confident in both our business model and TSR model and believe that not only 2020 will be strong, but as Gary mentioned, 2021 will be even stronger than we previously anticipated. Now we look forward to your questions. | 1 |
| Other values (598) |
| Value | Count | Frequency (%) | |
| I would now like to turn the conference over to Philip Taylor, Investor Relations. Please go ahead. Thank you, operator. Before we begin, I would like to inform you that comments and responses to your questions during today's call reflect management's views as of today, August 10, 2020, only and will include forward-looking statements and opinion statements. These include statements regarding our plans and expectations relating to regulatory clearance, including the process, time lines and expected outcomes; our commercial, operational, scientific, clinical and financial projection; products, including the uses benefits and applications of such products; our commercial and regulatory strategies; the impact of the COVID-19 pandemic and other future events. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our most recent Form 10-Q filed May 11, 2020 with the SEC. Our SEC filings can be found through our website or at the SEC's website. Investors are cautioned not to place undue reliance on forward-looking statements. Please note that this conference call will be available for audio replay on our website at pulsebiosciences.com on the News & Events section of our Investor Relations page. With that, I would now like to turn the call over to President and Chief Executive Officer, Darrin Uecker. Good afternoon. Thank you everyone for joining us today. This afternoon, we look forward to providing you with an update on all the recent progress made by our team at Pulse Biosciences. But before we begin, it is important for me to recognize the ongoing impacts of the COVID-19 pandemic outside our business. First, I would like to thank all the frontline health-care workers for their continued bravery an unwavering commitment to patient care. Our thoughts are with everyone who has been affected by this virus. It is clear at this point that the pandemic will persist in our communities for some time and we all must continue to be vigilant in our efforts to protect those around us. The health and safety of our employees remains our top priority and we are taking every precaution to ensure we create the safest workplace possible while observing all local and state health department regulations and guidelines. With that, as so many of experience disruption in their day-to-day lives, the pandemic has had an impact on our business as well. However, we are fortunate that to date these issues have not been significant and we have maintained our full workforce as we work through these challenging times. From the onset of these uncertain times, internally, we have relied on clear and concise communication of our objectives to maximize our productivity. The responsible attitude of our company, our single location and our current state of internal focus have been beneficial as we navigate the current landscape with the intention of bringing about improved conditions. Amid these unique circumstances, we remain excited about the opportunity ahead and confident we can execute our growth strategy over our next phase of growth. We remain focused on achieving regulatory clearances and continued progress toward commercialization of our proprietary technology along with the introduction of the CellFX System first to the aesthetic dermatology market. Now for anyone new to Pulse Biosciences, I would like to provide a quick background on our business. Our mission is to offer bioelectric medical solutions that make a meaningful difference for the betterment of patients and clinicians. We believe our device, the CellFX System will be capable of offering such benefits. The CellFX System is a multi-application platform that harnesses our proprietary Nano-Pulse Stimulation technology. NPS technology delivers nanosecond pulses of electrical energy to non-thermally clear undesired cells while sparing adjacent and needed non-cellular tissue. In the area of Dermatology this highly differentiated cell specific mechanism of action provides the ability to address cellular lesions that were not well addressable previously and at the same time, prevent collateral damage to the surrounding healthy skin. This enables clinicians to generate patient and caregiver friendly improved outcomes as older modalities typically result in a skin appearance that could be worse than the original condition. The CellFX System is a console based software-enabled device designed to accommodate the clinical workflow preferred by dermatologists. Based on our extensive industry experience and collaborative process with clinicians we design our CellFX System with an integrated cloud infrastructure we call CellFX Cloud Connect. It is the backbone of our innovative utilization-based business model that aligns the operational and financial interests of patients, practices and the company. CellFX Cloud Connect makes possible the wireless connectivity between the customer CellFX System, our e-commerce customer portal, clinical practice management tools to track utilization data and other operational metrics that are tracked by our internal customer relationship management and enterprise resource planning software systems. The customer portal is where practices purchase and wirelessly download cycle units directly to CellFX System. Cycle units on a per lesion basis, so the more lesion, the patient once cleared, the more cycle units consumed. This enables the physicians to have identifiable and controllable fixed costs per lesion and to charge the patient on a per lesion basis, which is aligned with the patient preference. Our model contrast with the currently employed disposable and single-use based medical device models, removing the friction for the physician that can occur in those models. One last note about the CellFX Connect is that it facilitates direct connectivity for pulse to remotely perform software upgrades to the CellFX System as well as provide several service and maintenance functions in real time. Because of this stability to streamline, be responsive and prevent disruptions of the clinician workflow, CellFX Cloud Connect allows us to provide unprecedented support and clinical practice growth enablement for our future customers. Turning now to our business objectives. On the call today, we are pleased to highlight our progress and developments in the three corporate priorities we laid out on our last call. First, on our regulatory clearance for our CellFX System, both in the US and in key territories outside the US, namely the European Union and Canada. And second, preparations for commercial launch of the CellFX System in these territories. And third, financing, with the closing of the rights offering in June. I will start off by addressing the successful close of our recent financing. On June 16, 2020, we closed the rights offering, generating net proceeds of $29.5 million for the company, with the potential for additional gross proceeds of $4.5 million through the exercise of issued warrants. The capital resulting from this shareholder friendly transaction has significantly strengthened the balance sheet and will provide the runway necessary to progress our other two corporate priorities, regulatory clearances and commercial launch preparations. We are thankful for this strong display of support and confidence from stockholders. Sandy will provide additional details on this very successful financing later in the call. Now to our second priority. On the regulatory front, our top objective is achieving 510(K) clearance for the CellFX system with an indication for use in general dermatology. As we mentioned previously, in May, we had a pre-submission or Q-Sub meeting with FDA in which we confirmed three imperative items regarding our subsequent work. The regulatory path for 510(K) general dermatologic indication for the CellFX System the adequacy of the selected credit [Phonetic] device and then our proposed preclinical studies performed under FDA's good laboratory practices would be sufficient for the indication and support of our 510(K) clearance. We receive solid confirmation of all of these items. It is important to note that the confirmed preclinical studies used animal skin and that no further human studies would be required for this submission. With a study design locked in, we began working with the GLP animal facility on the protocol and pilot activities for the general dermatologic study. Because of COVID-19, these labs were not operating at full capacity in June and are still operating at a restricted capacity to an extent as we update you today. Due to this constrained capacity, we began our study several weeks after our initial plan and we currently expect to submit this 510(K) in the next 60 to 90 days. On the positive side, we are pleased to report that we have now completed all the preclinical treatments required for the study. The next steps will include the pathology assessments of the skin treatment samples at the different follow up time points. Then with the data in hand, we will analyze, evaluate and prepare it for the 510(K) submission. We continue to be optimistic that the advantages of a general dermatology indication submission being more straightforward combined with the FDA's prior knowledge of our system and the data being provided could potentially result in a clearance somewhere between December year-end 2020 and Q1 2021. Our stepwise regulatory approach will continue with the pursuit of specific indications following the CellFX Systems initial clearance. While the submissions will be sequential we are able to parallel path some of our work. The next indication we will pursue is sebaceous hyperplasia or SH. On our May investor update call, we reported that we would be requesting a formal pre-submission meeting with FDA to discuss the required SH study design. Today, we are pleased to report that we requested the meeting in June and just last week had the meeting with the FDA. Leading up to the meeting, we received feedback from FDA on the draft study protocol, we provided meeting request. The meeting was very productive and we were able to agree with FDA on the basic design of the clinical study that would support a specific indication clearance for SH. Based on this, our next step is to incorporate FDA feedback into our investigational device exemption or IDE submission and submit this to FDA for approval to move forward with execution of this study. We anticipate submitting the investigational device exemption in the next couple weeks and to begin enrollment, it is important comparative trial in the fourth quarter. Barring any delays due to COVID-19, we estimate enrollment will take approximately three months. We plan to follow a similar path to achieve indications for warts and seborrheic keratosis, and we'll report on our timelines for this on upcoming calls. Onto our efforts to commercialize the CellFX System in the European Union by obtaining the CE Mark. As we discussed on our previous investor call, the delayed implementation of new regulations for medical devices in the EU due to the impact of COVID-19 has provided an opportunity to potentially receive a CE Mark for the CellFX System six months to nine months sooner than we otherwise would have been able to. And we are pleased to report that we continue to track according to this accelerated plan. Over the last several months, we have worked closely with our EU notified body, the company authorized to assess our compliance with the European Medical Device Directives or MDD and authorized use for the CE Mark. And we recently achieved the important milestone of submitting all required documents in support of the application for the CellFX System CE Mark. The application is currently under review and based on our discussions, we continue to believe we will gain approval for the CE Mark in quarter one, 2021, leading the commercialization of the CellFX System in the EU. We also continue to make progress on Canadian regulatory approval, another important territories. The Health Canada process leverages the work we are doing for the CE Mark and, therefore, we believe we will be in a position to submit an application for the CellFX System to Health Canada in Q4 of this year with the Canadian clearance in the first half of 2021. Now I will turn the call over to Ed to provide more details on our continued engagement with the scientific dermatology community. Thanks, Darrin. I will begin by sharing new marketing research on the continued business recovery in aesthetic dermatology practices, our target customers as they resume there are elective procedures, while navigating COVID-19 patients and staff safety measures. Next, I will highlight recent additions to our effort, expanding foundation of clinical evidence presented and published regarding the successful use of NPS technology on various difficult to clear skin lesions and describe our continued engagement with the scientific community as this important research is being published in peer-to-peer settings. Starting with our new marketing research regarding the continued recovery of the aesthetic procedure market, as patients continue to demand these services. Compared to the same marketing research fielded in May, our newest marketing research shows clear trends of both increases in current procedure volumes compared to last May and more bullish projections of a continued recovery over the next six months. Back in May, surveyed aesthetic procedure offices were operating at less than 50% of capacity, including almost complete elimination of elective aesthetic procedure due to COVID concerns and constraints. In the most recent July survey, the majority of dermatologists reported that patients future volumes had been restored to 50% or more of normal levels and the majority of practices have now opened their office to elective procedures. Regarding expectations for the future of patient volumes, the majority of physicians continue to project will take about six more months to return to normal procedure volumes. Taken as a whole, this new marketing research represents encouraging signs that the aesthetic specialty physician is thoughtfully implementing prudent COVID safety guidelines and that patient confidence in those safety measures is being reflected with a growing backlog of future appointments for aesthetic procedures. Again, these new marketing research findings all point through growing of optimism from aesthetic dermatology practices that they can keep their patients, their staff and themselves safe and invite patients back into their office for elective procedures. This optimism and trending to normal procedure levels is further supported by recent reports from our Scientific Advisory Board that their practices are continuing to experience high demand for scheduling aesthetic procedure appointments and have a backlog of several months of patient appointments. This is equally true intentions to continue and expand new clinical research projects for companies like Plus. As we're ready for the launch of our CellFX System in aesthetic dermatology, we have remained actively engaged with our key opinion leaders and clinical investigators who are experiencing increased demands for NPS technology to be presented at virtual scientific meetings and published in various dermatology specialty journals. Thanks to these continuing successes. There is a growing awareness and acceptance of NPS as an important new technology in as a research results and clinical findings continue to be presented at scientific meetings and published in the leading peer-reviewed journals like the American Society of Laser Medicine and Surgery Journal and the American Society of Dermatologic Surgery Journal as well. But we are pleased to see how innovative and effective the first dermatologists professional societies have been embracing and enhancing their virtual meetings to share their experiences with emerging technologies like NPS. There are some silver lining benefits to these virtual events including physicians having on demand access to this recorded scientific content that's available beyond those scheduled conference dates and their ability to share access to associates and clinic staff. As we mentioned on the previous call, the American Society for Lasers and Surgery and Medicine or ASLMS posted their annual conference this past month as a virtual meeting. NPS technology research was featured as its own new category of energy device. With the large selection of papers including updates on three of our recent clinical studies and e-posters on the two preclinical studies for a total of five abstracts presented at this important conference of energy device specialists. Our newest clinical results were presented by Dr. Victor Ross, Cast ASLMS President and Pulse Scientific Advisory Board member, who presented early data from our pivotal study in cutaneous non-genital warts. He reported a 79% complete clearance of warts including clearance in the warts that have failed to clear with previous treatment methods. These new data showing high rates of clearance in difficult to treat warts in a large clinical study represent a significant commercial opportunity for NPS in the future. Another important commercial application for NPS on which new data was presented is Sebaceous Hyperplasia or SH, which is a very common but difficult to clear facial lesion. The large multicenter clinical study was presented by Dr. Gilly Munavalli, a post clinical investigator and a member of our Scientific Advisory Board. These new findings prove that our energy settings both maintained efficacy and reduced healing time after these difficult to treat lesions were cleared by NPS. Another important presentation was given by the incoming, President of the ASLMS and also a member of our Scientific Advisory Board, Dr. Thomas Rohrer. He shared positive results in our first human feasibility study of NPS to clear biopsy confirm nodular Basal Cell Carcinoma or BCC. Dr. Rohrer discussed the successful elimination of BCC and the unique advantage of NPS to preserve the healthy non-cellular derma surrounding the malignant cells of BCC nests. This unique potential safety advantage for NPS was illustrated by independently rated clinical photographs and histological evidence of a normal epithermal recovery process and a low potential for scar formation compared to the current standard of care. The very positive findings from this feasibility study of Basal Cell Carcinoma, which is the most frequently occuring form of skin cancer, will be the basis for designing future studies of BCC, that are just part of our long-term development plan for the NPS platform for multiple applications in dermatology. The bright future of NPS technology was further highlighted at the ASLMS virtual conference into e-poster presentations. One was by Dr Brian Berman, showing that NPS could be used in combination with our modifier drug to synergize marine melanoma tumor clearance. And the second poster presentation by Dr. Brian Zelickson that provided key insights and evidence on the NPS cellular mechanism of actions by using high resolution electron microscopy images and demonstrates how NPS energy induced changes in the intracellular organelles such as the mitochondria and other vital cellular organelles. At the same meeting corresponding aspects for the SH warts, Basal Cell Carcinoma and acne studies were published in the print and online versions of the 2020 ASLMS abstracts publication, which is a special supplement of the official ASLMS Journal, lasers and surgery medicine. This is a publication that is frequently read and cited by physicians that specialize in the use of these energy-based devices. Two weeks ago, there was another virtual meeting of aesthetic specialist called The Symposium for Cosmetic Advances and Laser Education or SCALE. This symposia is considered one of the most premier multi-disciplinary meetings for cosmetic and medical dermatology. The prestigious scale faculty members are considered among the peers as respected scientific opinion leaders, many of whom are also Pulse Biosciences Scientific Advisory Board members or clinical investigators. Over 350 physicians registered for this event and NPS technology was spotlighted on the opening day of this virtual conference. First Dr. George Hruza, the 2019 American Academy of Dermatology President and early Pulse Investigator included NPS technology in his all about technology plenary session. He explained the cell specific mechanism of NPS and it's high efficacy and clearing SK lesions with a low risk of scar. Next Dr. Victor Ross delivered a 10-minute presentation dedicated to NPS Technology, where he highlighted, it's non-thermal cell specific mechanism of action benefits across several common dermatology applications, including sebaceous hyperplasia, seborrheic keratosis, cutaneous non-genital warts and basal cell carcinoma. These two recent virtual scientific meetings are a testament to the importance and impact of our continuing investment in clinical evidence and growth in scientific information validating the unique properties of NPS technology with the potential for a broad spectrum of clinical applications in dermatology. As of July 15, 2020, our clinical database has expanded to over 630 clinical study in patients with NPS results from over 34,00 treated benign and non-benign lesion procedures in human skin. Our commitment to high-quality science generated in partnership with some of the most respected leaders in dermatology has resulted in important advances in clinical outcomes, and then device development optimization that brings us closer to commercial product and production. And a receptive market for NPS technology based on our growing scientific foundation of acceptance and advocacy among key opinion leaders. While COVID production -- precautions may have constrained live physician meetings are prominent virtual presence as a live and ongoing in the scientific community. Now I'll turn the call over to Sandy for more on the financials. Thank you, Ed. For the second quarter of 2020 operating expenses were $11.4 million compared to $11.6 million for the prior year period. Decreases in research and development costs were partially offset by increases in general and administrative costs. Operating expenses for the three months ended June 30, 2020, included $2.4 million of non-cash stock-based compensation versus $2.7 million in the year ago period. General and administrative expenses consist of salaries and related employee expenses for executives, sales and marketing, finance, legal, human resources, information technology and administrative personnel, as well as professional fees, patent fees and costs, insurance costs and other general corporate expenses. General and administrative expenses increased by approximately $200,000 to $5.3 million for the three-month period ended June 30, 2020 from $5.1 million during the same period in 2019, primarily related to increased personnel from a year ago, offset by a reduction in marketing related outside service costs. Research and development expenses consist of salaries and related expenses for manufacturing, research and development personnel as well as clinical trials and consulting costs related to the design, development and enhancement of our potential future products. Research and development expenses decreased by $0.4 million to $5.9 million for the three-month period ended June 30, 2020 from $6.3 million during the same period in 2019, primarily due to reduced clinical trial expenses and development costs associated with the CellFX System. Net loss for the second quarter ended June 30, 2020 was $11.3 million compared to $11.4 million for the second quarter ended June 30, 2019. Excluding the net proceeds of the rights offering received in the three months ended June 30. Cash used in the second quarter totaled $7.9 million. Cash, cash equivalents and investments totaled $37.8 million as of June 30, 2020 compared to $15.9 million as of March 31, 2020. The successful completion of the rights offering generated net proceeds of $29.5 million. The basic subscription and oversubscription received totaled $56 million far exceeding the $30 million offering amount. The structure of this transaction served two important purposes. It maximize the net proceeds to the company by minimizing transaction costs compared to a traditional public offering of common stock and that afforded stockholders the right to participate maintaining their ownership position. Our Board of Directors approved the subscription price per unit equal to the lessor $7.01 the closing price of our common stock on April 23, 2020 or the volume weighted average price of our common stock for the five trading day period through and including the subscription expiration date of June 8. Upon the expiration of the subscription period, the subscription price per unit was determined to be $7.01, approximately 642,000 warrant with a cash exercise price of $7.01 per warrant share were also issued in the rights offering. Additional gross proceeds of approximately $4.5 million may be received from the exercise of these warrants. In addition to the strong display of import and confidence from our stockholders, this confidence was also reflected internally with insider participation totaling approximately $1.1 million. This excludes participation by Chairman, Robert Duggan. We are very pleased with the results from this offering and the strength of our balance sheet. Now I will turn the call back to Darrin. Thank you, Sandy. To conclude, amid the challenging circumstances created by COVID-19 we persisted and had a very productive quarter at Pulse Biosciences. We have adapted our operations, prioritize the safety of our employees while maintaining our driven and collaborative culture. We are progressing the CellFX System allowing multiple regulatory path for multiple indications with FDA, the CE Mark and Canadian approval. To reiterate our upcoming milestones, we expect to submit our 510(K) for a general dermatologic indication within the next 60 days to 90 days. Starting our SH comparative study to support a specific indication in the US, which we expect to begin in early Q4. Working with our notified body toward completion of the review process for the CE Mark, which we expect to occur in quarter one 2021 and a Health Canada approval expected in the first half of 2021. At the same time, engagement with the scientific community albeit through new mediums like digital platforms and virtual events remain high. Recent programs have featured many positive investigational studies regarding our Nano-Pulse Stimulation technology. Leading key opinion leaders in this space continue to support our technology and educate other dermatologists on its variety of benefits. Again, I would like to thank our employees for their dedication and commitment to our progress over these trying past few months. All of your efforts are appreciated. Through a continued strong collaborative effort, we are confident we will be able to execute our strategy throughout the coming months and achieve approval for our CellFX System. We are excited about the potential benefits, NPS will provide to patients and clinicians across various unmet needs. We look forward to providing you updates in the future. Before we move into Q&A, I would like to welcome Richard van den Broek to our Board of Directors. We are very excited about the experience and leadership he brings to the company. Joining me for Q&A is Ed Ebbers, Executive Vice President and General Manager, Dermatology; and Sandy Gardiner, Executive Vice President and Chief Financial Officer. Operator, let's open the call for questions. | 1 | 0.2% | |
| Welcome to the BellRing Brands third-quarter 2020 earnings conference call and webcast. Hosting the call today from BellRing Brands are Darcy Davenport, president and chief executive officer; and Paul Rode, chief financial officer. Today's call is being recorded and will be available for replay beginning at 1:30 p.m. Eastern Time. The dial-in number is (800) 585-8367 and the passcode is 9248828. [Operator instructions] It is now my pleasure to turn the floor over to Jennifer Meyer, investor relations of BellRing Brands for introductions. You may begin. Good morning, and thank you for joining us today for BellRing Brands third-quarter fiscal 2020 earnings call. With me today are Darcy Davenport, our president and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks. And afterwards, we'll have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the investor relations and the SEC Filings section at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. Thanks, Jennifer, and thank you all for joining us this morning. Last evening, we reported our third-quarter results, as well as posted a supplemental presentation to our website. This presentation is designed to provide more insight into our business, consumption and key metrics. We reported third-quarter sales of $204 million and adjusted EBITDA of $38.5 million. As we discussed last quarter, we ended Q2 with inflated trade inventories after our customers overbought following the mid-March consumer stock-up. This elevated Q2 sales at the expense of Q3 and factored into our second-half planning. In reaffirming guidance in May, we highlighted that the second half would be backloaded warded. More specifically, we expected roughly 56% of our second-half revenue to fall into the fourth quarter. With July net sales coming in at close to $100 million, this plan is proving out. Outside of the timing shift, our actual results were shy of our internal expectations, mainly due to a slower-than-expected RTD category recovery as a result of less on-the-go occasions. Specifically, we forecasted a consistent improvement from the April low reaching pre-COVID levels by June. Instead, we saw more of a W-shaped recovery, with May dipping back down and not reaching pre-COVID levels until after the quarter ended in July. Coupled with longer-than-expected international recovery, this shaves $50 million to $60 million from our second-half sales forecast, which is equally split between Q3 and Q4. Although we are seeing encouraging signs in the July RTD category consumption period, we lowered our Q4 growth assumptions given the choppy recovery we experienced in Q3. However, because of the overperformance in the first half, combined with nonstrategic SG&A reductions in the back half of the year, we still expect to deliver our full-year EBITDA in line with our original expectations. I'd like to now focus on brand highlights, progress against our growth strategies and end with our outlook. Despite strong COVID category headwinds, Premier Protein shake consumption was strong this quarter, up 11% across both tracked and untracked channels. Untracked outpaced tracked channels, growing 33% in the quarter, while tracked declined 4.5%. eCommerce, Premier Protein's third largest channel, led the way, up an amazing 185%. We also saw terrific growth in food and drug, up 38% and 33%, respectively, driven by distribution and increased marketing and promotion. July consumption has remained strong, up 12% in tracked and untracked channels. Untracked continues to drive our growth, up 39%, while tracked channels faced headwinds in July due to promotional timing shifts that will reverse later in the quarter. Now to our growth strategies. Strong marketing programs continue to be drivers for the brand. Premier Protein increased two share points in the quarter to 18% of the RTD category. Our promotional strategy remains effective, driving approximately 40% of our consumption growth and TDPs continue to increase, up 6% in the quarter. Premier Protein household penetration substantially increased year-to-date to 6.6%, supported by media, including television advertising. Our new products continue to perform well and are gaining distribution. Café Latte and our powder product velocities are ranked in the top 10% of the category. Protein with Oats continues to sell well, and we have gained expanded distribution, which we will see in the next two quarters. I'm excited about our pipeline of new products coming out over the next several months, including welcoming back my personal favorite, Pumpkin Spice, that ships this month. Now to our other brands. Dymatize's domestic business had a good quarter, up 9%, led by club and eCommerce. Our launch of ISO100 Cocoa and Fruity PEBBLES had quickly shown success, ranking in the top 10 SKUs where it is sold. Unfortunately, both Dymatize and PowerBar's international businesses continue to be challenged as a result of COVID. Our supply chain remains stable. During the quarter, we successfully brought online a fifth co-manufacturing location. This was challenging given the COVID environment, and I'm proud of our team's hard work on this achievement. This additional capacity gives us further flexibility to support our growth plans. Now to our outlook. That pandemic has created strong category headwinds, and the slower-than-expected recovery has affected both of our domestic and international businesses. As a result, we have lowered our back-half sales; however, despite those challenges, we still expect to deliver double-digit net sales growth for the year. In Q4, we have significant growth drivers lined up, including promotions in most major retailers, expanded distribution, and we already have a strong July in the books. Given we exceeded our expectations for the first two quarters and are we confident in our ability to achieve our Q4 forecast, I'm happy to reaffirm our full-year EBITDA guidance. I'm incredibly proud of our company, and I don't want to miss the opportunity to publicly thank all of our employees and our co-manufacturing partners for navigating this stressful time. I continue to have confidence in our brand fundamentals, and I'm energized by the business momentum, expanded distribution, innovation pipeline and our long runway for growth. I will now turn the call over to Paul. Thanks, Darcy, and good morning, everyone. Net sales for the quarter were $204 million and adjusted EBITDA was $38.5 million. Third-quarter results, as anticipated, were pressured by the impact of COVID, as well as changes in customer inventory levels when compared to prior year. COVID impacted our quarterly net sales results on several fronts. First, it took longer for retailers to reduce their on-hand RTD shake inventory from inflated levels at the beginning of the quarter. Second, as Darcy detailed, the RTD liquid category had significant headwinds. Third, our international business, which historically has accounted for 50% of our net sales declined significantly compared to last year. Though we anticipated many of these impacts, the category recovery was slower than expected. From a shipment perspective, Premier Protein net sales declined 12%, with RTD shake net sales down 10%. The disconnect between shipments and our strong 11% consumption growth for RTD shakes was largely expected. Shipment delayed consumption as retailers worked through an overbuy in March. Additionally, recall we lapped last year's pull-forward shipments related to a fourth-quarter promotion. These inventory related headwinds were partially offset by strong distribution gains across channels. Dymatize has strong growth in the club and eCommerce channels, which combined grew 50% in the quarter. We anticipated strong growth for these channels in the second half, and the brand continues to gain distribution in FDM and club while consistently delivering double-digit growth within eCommerce. This growth was outlaid by COVID-driven declines globally for the specialty business, resulting in an overall net sales decline of 16.6%. PowerBar net sales declined 44%, reflecting the impacts from our portfolio optimization strategy in North America and lower international volumes driven by specialty store closures. We expect COVID to weigh on the brand's results in the fourth quarter, but the decline should moderate now that we have fully lapped the portfolio optimization strategy in North America. Turning back to consolidated results. Gross profit of $69 million declined 24% this quarter, with gross profit margin declining 450 basis points to 33.6%. The margin decline related to anticipated higher input costs, primarily milk-based proteins, and a higher trade promotion rate. SG&A expenses as a percentage of net sales increased 240 basis points to 16%. This increase was driven by a strategic increase in marketing spend of $2 million and $2.1 million of incremental public company costs, offset partially by lower compensation expense. Adjusted EBITDA for the quarter was $38.5 million, a decrease of 37.1%, with an adjusted EBITDA margin of 18.9%. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We had a strong third quarter for cash flow, generating $32 million from operations, and we repaid the $65 million we had borrowed under our revolver as a precautionary measure in light of the uncertainty COVID created. This left us with $22.5 million of cash on hand and $145 million available under our revolver at quarter end. As of June 30, net debt was $715 million and net leverage was 3.8 times. Although this is an increase in leverage from last quarter, it is in line with our expectations given our quarterly adjusted EBITDA compared to prior year. We still expect the end of fiscal year with materially lower net leverage and to reach our net leverage target of 3 times in fiscal 2021. Turning to our outlook. We are pleased to reaffirm our fiscal year 2020 adjusted EBITDA outlook of $192 million to $202 million. However, based on lower second-half expectations due to COVID, we have adjusted our net sales range to $960 million to $980 million. In spite of COVID headwinds, the fourth quarter is expected to deliver strong double-digit top line growth driven by Premier Protein RTD shakes, which will benefit from distribution gains and incremental promotional activity. We anticipate the remainder of our brands will be weighed down by the lingering impacts of COVID, especially the domestic and international specialty businesses. For Dymatize, these headwinds are expected to more than offset continued strong gains in e-commerce, club and FDM. Overall, we are confident in our ability to deliver strong fourth-quarter results. Category dynamics have improved from the third quarter and the fourth quarter is off to a great start as evidenced by our strong July net sales. Premier Protein, which is 80% of our net sales, has continued to register double-digit consumption growth in the face of COVID, and we expect that growth trend to continue in Q4. With that, I'd like to turn the call back over to the operator for questions. | 1 | 0.2% | |
| Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunoco LP's Second Quarter 2020 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Scott Grischow, Vice President of Investor Relations. Thank you. You may begin. Thank you, and good morning, everyone. On the call with me morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Karl Fails, Chief Operations Officer; and other members of the management team. A reminder that today's call will contain forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors. During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. I'd like to begin today's call by reviewing the financial and operating results for the second quarter of 2020. Despite the reduced volume we saw this quarter, our business performed well, and our cost reduction efforts are on plan. We are on solid financial footing as we continue to navigate this challenging environment. For the second quarter of 2020, the partnership recorded net income of $157 million, which included the benefit of a $90 million noncash inventory adjustment. Adjusted EBITDA was $182 million compared to $152 million in the second quarter of 2019. Fuel volumes totaled 1.5 billion gallons, down 26% from a year ago. The second quarter volumes reflect a full quarter's impact of COVID-19 on our business. Fuel margin was $0.135 per gallon, up from $0.091 per gallon for the same period last year. Lease income of $34 million was essentially flat, both sequentially and year-over-year. Our gross profit from non-motor fuel sales was $30 million, which represented a $22 million decline from the previous quarter. As a reminder, the first quarter included an $18 million favorable legal settlement. Total operating expenses for the quarter decreased to $97 million from $143 million in the first quarter and $123 million a year ago. Karl will provide additional detail on expenses in his remarks. Moving on to capital. We spent $14 million on growth projects and $4 million on maintenance capital in the second quarter. As we announced in March, we expect to spend approximately $75 million in growth capital for the full year and approximately $30 million in maintenance capital. Second quarter distributable cash flow as adjusted was $122 million, yielding very strong coverage ratios of 1.41 times for the current quarter and 1.55 times on a trailing 12-month basis. On July 28, we declared an $0.8255 per unit distribution. On the balance sheet, our long-term debt decreased by $110 million to just under $3.1 billion. Our liquidity remains strong, with $1.3 billion remaining under our revolving credit facility and no debt maturities prior to 2023. We ended the quarter with a leverage reading of 4.07 times, down from the 4.39 times in the first quarter. Finally, as many of you saw in our June press release, Sunoco LP's Chief Financial Officer, Tom Miller, is retiring from Sunoco effective September 1. On behalf of the entire Sunoco LP leadership team, we would like to personally thank Tom for his many contributions to the partnership and wish him health and happiness in the next chapter of his life. I will now turn the call over to Karl. Thanks, Scott, and good morning, everyone. Our strong results in the second quarter highlight the resiliency of our business model, even in the face of the continued impact of COVID. As Scott mentioned, our second quarter volumes were down 26% compared to last year. Looking more closely at the monthly trends, volumes bottomed in mid-April with year-over-year declines of around 45%, but showed meaningful improvement from there. In May, our volumes were off about 30%, followed by a decline of about 15% for June. The pace of continued recovery in fuel demand has flattened over the last several weeks with the rise in coronavirus cases in some geographies. For the month of July, we averaged about 15% of last year's volumes and have seen similar results in the mid-teens in early August. Our normal seasonal pattern is for average daily volume to rise each month from the beginning of the year to a peak in August at the end of the summer. This means that even as volumes have flattened on a relative basis, we have seen increases in absolute volumes so far in the third quarter. I'd like to provide some context around these volume trends. We have clearly benefited from the geographic diversity of our fuel distribution network. While demand in southern states held up more strongly than in other areas of the country during the onset of the pandemic, it has been more impacted on a relative basis in recent weeks as re openings are scaled back. Contrast this with the mid-Atlantic and Northeast states, which continued to see improvement as re openings progress. While volumes were notably weak in the second quarter, fuel margins showed consistent strength throughout the quarter, even in the face of increasing commodity prices. These strong margins have continued into July and August. Taking a macro look, the strong margins can be primarily attributed to broader market forces that have impacted the industry over the course of the last few months. Fuel volume declines across the country increased the breakeven cost for many operators and provide favorable margin environments for market participants from single site operators to companies with scale. These increased fuel margins have done much of the work to offset the gross profit impact in each channel of distribution. The volume declines and resulting margin increases also occurred in a favorable environment for the consumer, as the average retail price for gasoline during the second quarter was the lowest since 2016. While these market forces provide a favorable landscape for our gross profit optimization strategies, the rest of the work must be done through expense reductions. We are skilled and strongly positioned in both of these areas, and thus have been able to weather demand declines as well or better than most. We have a deep knowledge of the markets where we operate and had committed organizational resources to gross profit optimization and expense management well before this recent demand shock. Scott mentioned our total expenses of $97 million for the second quarter and that we are on plan to deliver total expenses of between $460 million and $475 million for the full year 2020, consistent with our commentary last quarter. Since a portion of the expense reductions consisted of volume-related items, we would expect that the second quarter would be our lowest expense quarter of the year. As volumes have recovered, we anticipate quarterly expenses in the back half of the year being higher than our second quarter run rate, but well within the range that we have communicated. As we look forward to the second half of 2020, there is still uncertainty around the shape of the volume recovery curve. However, we expect market forces and our gross profit optimization strategy to result in fuel margins remaining above our historical annual range. Our commitment to expense management delivers results directly to the bottom line. As our second quarter performance demonstrates our ability to optimize within the current market environment as well as our focus on capital and expense management will remain key. We are confident that our demonstrated strength in operational and financial discipline will continue to yield solid financial results throughout the rest of the year and beyond. I will now turn it over to Joe to share some closing thoughts. Joe? Thanks, Karl. Good morning, everyone. Let me start off by thanking our employees and our field distribution partners for their continued dedication in keeping Sonoco strong and stable during these unprecedented times. Last quarter on our earnings call, we suspended our 2020 EBITDA guidance, given the heightened level of uncertainty at that time. Today, we have far better clarity for the rest of the year. As a result, we believe our 2020 EBITDA will be greater than $700 million, which is above the original guidance that we provided last December. Our revised outlook has been shaped by a few key items. The first item is obvious. We have delivered two really strong quarters that are already in the books. Second, we believe the fuel margin environment will remain attractive. Although the exact shape of the demand recovery curve is still to be determined, we expect the margin environment to be above historic average. It is too early to determine whether recent events have established a new long-term baseline for margins. However, we believe the industry breakeven point for fuel margin has gone up for various operators, meaning certain operators will require greater margins to remain profitable, and this is good for us. In a different scenario where volume rapidly recovers and fuel margin reversed the previous mean, this is also good for us, less margin but more volume. Overall, I believe the gross profit environment for the second half of the year will remain very attractive. But it will be difficult to match the first half of this year given the historic drop in crude prices that occurred in March. Finally, a revised outlook reflects our ability to deliver on the expense guidance that Karl noted earlier. The path we're on now to have an exceptional strong year was not exactly how we envisioned or described it back in December. However, despite the obvious challenges facing our nation, we expect to deliver yet another strong year. Our financial stability has positioned us for growth. We continue to deploy capital to grow our fuel distribution business. The opportunity sets remain robust, and we expect these organic opportunities to remain year after year. On the midstream side, we have rededicated resources to look for highly synergistic acquisitions that further enhance our overall portfolio. Let me close by saying that over the last few years, we have built a very resilient business model. We remain proactive throughout the current challenge as well as any future challenges to ensure a stable long-term future for Sunoco. Operator, that concludes our prepared remarks. You may open the line for questions. | 1 | 0.2% | |
| I would now like to turn the call over to the company. Please go ahead. Good morning. I'm Christine Lindenboom, Senior Vice President of Investor Relations and Corporate Communications at Alnylam. With me today on the phone are John Maraganore, Chief Executive Officer; Barry Greene, President; Akshay Vaishnaw, President of R&D Jeff Poulton, Chief Financial Officer; and Yvonne Greenstreet, Chief Operating Officer. Andy Orth, Head of the U.S. Business, is also on the phone and available for Q&A. For those of you participating via conference call, the accompanying slides can be accessed by going to the Events section of the Investors page of our website, investors.alnylam.com/events. During today's call as outlined in slide two, John will provide some introductory remarks and general context, Barry will provide an update on our commercial and medical affairs progress, Akshay will review recent clinical and preclinical updates, Jeff will review our financials and Yvonne will provide a brief summary of upcoming milestones before opening the call for your questions. I would like to remind you that this call will contain remarks concerning Alnylam's future expectations, plans and prospects, which constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent quarterly report on file with the SEC. In addition, any forward-looking statements represent our view only as of the date of this recording. It should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update such statements. With that, I'd like to turn the call over to John. Thanks, Christine, and thank you, everyone, for joining the call today. Let me start by expressing Alnylam's support for Black Lives Matter and our support for the efforts to end systemic racism in our country. At Alnylam, we stand against all forms of discrimination; and in our core, we believe, in justice, equity and inclusion. We stand in support of peaceful protest aimed at achieving real and sustainable change. Enough is enough, and it's time to finally cure the refractory scourge of hate. I'd also like to comment briefly on the Trump administration's recent announcement on drug prices. While we fully support the need to reduce or even eliminate patient out-of-pocket costs for prescription drugs, the administration's proposal to potentially introduce a so-called Most Favored Nation executive order is both unfortunate and misguided. Importing foreign price controls will harm American innovation and hurt our patients. Even if this executive order is finalized, we don't believe it will stand. With that, let's now turn to our business. As all of you know, the COVID-19 pandemic remains dynamic, uncertain and unpredictable. That said, we continue to view the situation in the same framework we discussed last quarter: a pandemic phase in Q2, a recovery phase in Q3 and a new normal starting in Q4. While the pandemic continues or even worsens in many states in the U.S., we believe Alnylam's business is benefiting from our broad global presence. In spite of the ebbs and flows, we are seeing healthcare systems now remaining open, and we don't currently expect a repeat shutdown of healthcare systems like what was seen in Q2, especially in the April-May time frame. Our confidence in the second half is reflected in an upward revision in our ONPATTRO revenue guidance range. Overall, we're really proud of our field teams around the world and their ability to adapt quickly and safely to meet the needs of patients, embodying our challenge accepted mentality. We are extremely pleased with global ONPATTRO and GIVLAARI top line performance in Q2, which Barry will elaborate on shortly. We're also proud of the significant progress we made across our pipeline in the quarter, as Akshay will discuss. Another highlight for the quarter was our landmark strategic financing collaboration and inclisiran royalty monetization we completed with Blackstone Life Sciences worth up to $2 billion. We believe this collaboration secures our bridge toward a self-sustainable financial profile without the need for any future equity financings. Now before I share my before I close before I share my closing remarks, I want to take a moment to acknowledge the news we announced earlier this morning about Barry Greene's planned departure from Alnylam at the end of the quarter. Barry and I have been working side by side for over 20 years, first at Millennium and then for 17 years at Alnylam. And I know that I speak for everyone at Alnylam in thanking Barry for his exceptional contributions and dedication to the company. We all owe him tremendous gratitude for his outstanding leadership and track record that have contributed to the delivery of RNAi therapeutics as a whole new class of medicines for patients. I have no doubt Barry will continue to be a highly impactful leader in the life sciences. I'm grateful for his agreement to consult with Alnylam as needed for a two-year period, and I wish him all the very best in his next endeavors. We are also very pleased to share that Yvonne Greenstreet, our current Chief Operating Officer, will step into the expanded role of President and Chief Operating Officer on October 1. We believe Yvonne is uniquely suited for this opportunity given her strong command of our business, strategic leadership and proven ability to drive results. We are initiating a search for a Chief Commercial Officer. And during the search, we anticipate no impact to our ongoing commercial execution. Please join me in wishing Barry well as he pursues the next chapter of a remarkable career and congratulating Yvonne on her expanded role at Alnylam. I'd like to finish with my perspective on the big picture for the company. We continue to lead the advancement of RNAi therapeutics as a whole new class of medicines, and we remain on track to achieve and exceed our Alnylam 2020 goals, exiting 2020 as a multiproduct global commercial company with a deep clinical pipeline for future growth and a robust and organic product engine for sustainable innovation. Without a doubt, we're excited for the promising future that Alnylam is poised to deliver as a top-tier biopharmaceutical company focused on advancing medicines with transformative potential for patients around the world. With that, I will now turn the call over to Barry for one last time, Barry, to review our commercial progress and medical affairs activities in more detail. Barry, take it away. Thanks, John, and good morning, everyone. Before I provide the quarterly highlights, I'd like to make some brief remarks about my planned transition from Alnylam. First, congratulations again to Yvonne Greenstreet. She is a remarkable person and well deserves the President and COO role. I know that Yvonne will make sure that Alnylam continues to be a company doing the right things and focusing on patients, and I'm counting on it. As for me, it's been a tremendous privilege to serve as President of Alnylam for such a long period of time. I'm very proud of what we've been able to accomplish during my 17 years, and we built a global fully integrated multiproduct company that is recognized for excellence in R&D and recently for our commercial strength as well. My decision to transition is based on the desire to pursue new leadership opportunity in the next chapter of my career. I'm fully confident Alnylam will achieve its ambitious goals with quality and excellence with the great team we have in place. I'll continue to support Alnylam throughout this transition and have no doubt about the company's future prospects as a top-tier biopharmaceutical company. So let's now review our. For ONPATTRO, we achieved $66.5 million in global net product revenues. As of June 30, over 1,050 patients were on commercial ONPATTRO treatment worldwide, representing an increase of over 100 patients from end of Q1, a very impressive accomplishment in the height of the global pandemic during Q2. Let's start with some more color on the U.S. As anticipated, the COVID-19 pandemic had impact on our business in the second quarter, with patient demand decreasing due to reduced adherence as some patients skip doses or experience dose delays while moving to new care sites. Also as anticipated, we saw the pace of new patient initiating therapy slow in the U.s. during the quarter due to reduced genetic testing, diagnosis and patient flow through the healthcare systems. Finally, our U.S. business was also impacted by inventory destocking and an increase in cost in the second quarter. Jeff will provide more color on these details later in the call. While our focus today is on Q2, as we enter Q3, we're now seeing what looks like a healthy return of genetic testing and patient flow through the U.S. healthcare system even in states where COVID-19 cases are rising. And in fact, our July, on our last numbers are near the January numbers we saw earlier in the year. A really good sign. In the second quarter, we continue to see great progress in new prescribers. For the second quarter, 40% of submitted start forms came from new writers with an equal mix of neurologists and cardiologists. In the U.S., we saw continued concomitant use of ONPATTRO with TTR stabilizers in the quarter. We believe this trend will continue to grow as physicians see progression of polyneuropathy on stabilizers and treat the different manifestations of hATTR amyloidosis. Now turning to the rest of the world. We made very positive progress with ONPATTRO in the second quarter. Rest of world sales for ONPATTRO were $34.2 million and relative to the U.S. benefited from continued geographic expansions with launches in Spain, Italy and other countries. In addition, we saw relative strength in our ex U.S. markets between Europe and Japan for their management of the pandemic. As John noted, this is a nice validation of the decision to build a global, fully integrated business. With today's announcement of achieving pricing and reimbursement agreement in France, we're pleased to report that access has been secured in all priority markets in Western Europe. Notably, our team has secured pricing and reimbursement approval in all major European markets in under two years post-approval by the EMA. This is a much faster rate than most orphan medicines are able to achieve. Japan was again a country of strength for ONPATTRO. Japan has now become our second-largest country after the U.S. for our ONPATTRO revenue, and we expect continued growth in new patient discussion on stabilizer therapy. On the medical care side, our team remains committed to addressing the challenge of raising disease awareness and improving diagnosis of hATTR amyloidosis, including with Alnylam Act, our third-party genetic screening initiative in the U.S., Canada and Brazil. As of July, over 27,000 samples have been submitted, out of which over 1,600 have tested positive for pathogenic TTR mutation, which is tracking at a historic 6% to 8% positivity rate. These numbers show the testing slowdown in Q2 we mentioned on our last earnings call. The good news is that, those numbers have picked up to near January levels. Moving on to GIVLAARI. We are really pleased with the progress in our launch, most of which was done virtually. We achieved $11 million in global net product revenues. We received over 85 start forms in the U.S. with over 100 patients globally on commercial treatment from launch through June 30. As we have now begun to open ex U.S. territories and also because currently 25% to 30% of U.S. patients come from outside the start form channel, we'll discontinue providing start form metrics in future quarters as we did last year for ONPATTRO. In the U.S., we observed a broad prescriber mix, including hepatologists, gastroenterologists and other specialties, both in preferred centers of excellence and in the community. Of note, 76% of our Q2 starts were from new writers. Our progress with value-based agreements has been extremely strong with seven VBAs completed with U.S. payers, and we now have confirmed access for over 75% of covered U.S. lives across commercial, Medicaid and other government payers. We've not experienced any care to date, pleased to see plans adopt medical policies, not more restrictive than our labeled indication. ASMR III saw strong initial performance as well with the successful and as noted virtual launch in Germany as well as named patient sales in other countries, including French cohort ATU program. We've been positively encouraged by the responsiveness of European payers despite the COVID-19 pandemic. Of note, GIVLAARI received an improvement of medical benefit or ASMR score of two in France, concluding that GIVLAARI offers significant additional therapeutic value. This is an enormous accomplishment. For context, only two new commercial medicines were granted with an ASMR rating of two for 2019. Our medical affairs team is also focused on improving awareness and diagnosis with AHP. Through Alnylam Act, we can report 937 test submitted and 92 patients with positive AHP mutations as of mid-July, showing continued 10% positivity rate. A notable diagnosis trend emerging is the robust use of urinary PPG test informed diagnosis, and we expect patient identification efforts will be meaningfully enhanced by this nongenetic testing method. Of course, we're now also preparing for the potential launch of lumasiran later this year. Importantly, we'll be leveraging our existing commercial infrastructure for this launch with small additions of resources for field-based teams. When we gain approval, we'll let specific commercialization support medicine therapeutic expected to market. In conclusion, the second quarter was challenging due to the pandemic particularly in the United States, but was much better than the downside case we anticipated as we entered Q2. The credit goes to our teams around the world who face the obstacles head on to deliver the important medicines to our patients. With that, I'll now turn the call over to Akshay to review our recent R&D and pipeline progress. Akshay? Good morning, everyone, and thank you, Barry. I should say thank you, Barry, for guiding me, for helping build our company and, most of all, for working so tirelessly to help all the patients we seek to serve. So with that, I'll start with our efforts in ATTR amyloidosis where we're advancing our two product candidates: patisiran and vutrisiran. As ONPATTRO is currently approved in multiple markets around the world to treat polyneuropathy associated with hATTR amyloidosis, we're committed to expanding the product's label to include the treatment of cardiomyopathy in both hereditary and wild-type ATTR amyloidosis patients. To this end, we continue to enroll patients in APOLLO-B and continue to expect completion of enrollment in 2021. We've seen enrollment pick up over the last month as clinical sites start to open up around the world. In addition, we're also advancing vutrisiran, an investigational RNAi therapeutic delivered by quarterly subcutaneous injection that's also in development for the treatment of ATTR amyloidosis. Here, we're conducting two Phase III studies. The first is HELIOS-A, which is evaluating vutrisiran in hATTR amyloidosis patients with polyneuropathy. Enrollment is complete in HELIOS-A, and we remain on track to report top line results early next year. The second Phase III study of vutrisiran is HELIOS-B, which is being conducted in in inherited and wild-type ATTR amyloidosis patients with cardiomyopathy. As with APOLLO-B, site activation enrollment in HELIOS-B are now picking up. If HELIOS-B is positive, it could allow for vutrisiran's entry into the very large wild-type ATTR amyloidosis market opportunity with the product label that includes cardiovascular outcomes. Let's move to GIVLAARI, which is approved in the U.S., EU and now in Brazil to treat acute hepatic porphyria in adults. Of course, the highlight of GIVLAARI in the recent period was our Brazilian approval, and we're continuing our geographic expansion for this product with MAA submitted in Switzerland and Israel and plans for submission in Japan in the coming months. During the second quarter, we also presented a new 12-month interim data from the ENVISION Phase III study, demonstrating sustained efficacy and acceptable safety through 12 months of treatment, with evidence for potentially improved efficacy over time. In addition, we're proud to have published pivotal results from the ENVISION Phase III study in The New England Journal of Medicine. This is our ninth paper on RNAi therapeutics published in the journal. I'll now turn to recent progress with lumasiran, an investigational RNAi therapeutic that we're developing for the treatment of primary hyperoxaluria type 1, or PH1. At the ERA-EDTA meeting in June, we reported the full set of positive results from ILLUMINATE-A, which demonstrated that lumasiran significantly reduced urinary oxalate levels, the cause of progressive kidney failure in PH1. In addition, lumasiran showed an encouraging safety profile. Our overall lumasiran program also includes our ILLUMINATE-B study in pediatric patients under six years of age. Enrollment is complete, and we remain on track to report top line results soon in mid-2020. The ILLUMINATE-C study in severe PH1 continues to enroll and has been proceeding well even during the pandemic. We completed our NDA and MAA submissions in the second quarter. The FDA granted priority review for the NDA and has set an action date of December 3, 2020. EMA has granted accelerated assessment of the MAA. As you know, we have two additional late-stage programs that are in development with partners. This includes inclisiran in the development in development for hypercholesterolemia partnered with Novartis, which is currently under review for approval in the U.S. and EU. Both NDA and MAA filings have been accepted, and Novartis expects initial approval in the U.S. in late 2020. Novartis has indicated that they remain on track for approval this year with a December action date in the U.S. Our late-stage pipeline also includes fitusiran in development for hemophilia A or B with or without inhibitors, partnered with Sanofi. Sanofi has recently disclosed that two of the three ATLAS Phase III studies have completed enrollment and that they remain on track to report top line ATLAS Phase III data in the first half of 2021. Sanofi also presented new positive results from an interim analysis of the Phase II OLE study of fitusiran, showing impressive reductions in the annualized bleeding rate with encouraging safety. Now in addition to our late-stage clinical programs, we believe we've also been making great progress with our early and mid-stage programs. The highlights of the quarter was the positive top line results from our ALN-AGT Phase I study in patients with hypertension, specifically ALN-AGT demonstrated an over 90% knockdown of angiotensinogen and a greater than 10 millimeters mercury lowering systolic blood pressure with the durability that's caused a quarterly or even less frequent subcutaneous dosing regimen. We're also encouraged by the tolerability profile for ALN-AGT. We now look forward to presenting more complete data from the ongoing Phase I study at a scientific meeting in the second half, assuming abstract acceptance. We're very excited about the potential for ALN-AGT to reimagine the treatment of hypertension with tonic-controlled blood pressure that we believe could result in important benefit for patients. Our next clinical program is ALN-HSD, an investigational RNAi therapeutic for the treatment of NASH, for which we recently filed a CTA. This program is being advanced in collaboration with Regeneron. We're also making strong progress on our many RNAi therapeutic opportunities beyond the liver. For our COVID-19 RNAi therapeutic collaboration with Vir, we selected a development candidate, ALN-COV or VIR-2703, with potent and highly cross-reactive activity toward SARS-CoV-2, the virus that causes COVID-19. We continue to expect an IND filing around year-end 2020. We're also pleased to announce today that Regeneron has elected to opt-in to the ALN-APP program. We aim to get an IND filed for ALN-APP in mid-2021, and this is expected to be our first CNS program to enter clinical development. And with that, let me now turn it over to Jeff to review our financial results. Jeff? Thanks, Akshay, and good morning, everyone. I'm pleased to be presenting Alnylam's Q2 2020 results. As Barry has already highlighted, it was a very strong quarter of commercial execution, with outstanding results for both ONPATTRO and GIVLAARI. Turning to our results first for ONPATTRO, generated $66.5 million in global net ONPATTRO revenue for the quarter, which was impacted by the pandemic, particularly in the U.S., with global growth being flat versus the first quarter of 2020 and a 74% increase compared with Q2 2019. U.S. growth decreased 13% during the quarter compared with Q1 and was primarily impacted by the following: a 4% decrease in demand from reduced patient adherence due to the COVID-19 pandemic, as Barry previously mentioned; an 8% reduction due to inventory destocking during the quarter with pending inventory now at 1.5 weeks in the distribution channel at the end of Q2; and a 1% decrease due to a modest increase in gross to net deductions in the quarter. We continue to expect gross to net deductions will remain in the mid-20s globally for ONPATTRO in 2020. In our international markets, performance was very strong in spite of the pandemic, with growth of 16% versus Q1. Growth in Europe was highlighted by strength in recently launched markets in Italy and Spain. While in Asia, growth in Japan remains robust, with Japan now representing our second-largest market for ONPATTRO based on dollar sales, as Barry mentioned. First time this quarter, the contribution of our international markets to global ONPATTRO sales exceeded the U.S. contribution. We are pleased to have a strong and global brand, which we believe is beneficial to long-term growth. Turning to our results for GIVLAARI. We had a strong second quarter, generating $11 million in global net revenue in the quarter, representing over 100% growth compared to the first quarter. This growth was driven by ongoing success of the U.S. launch where we did not experience reductions in patient adherence at the same level as ONPATTRO as well as an additional contribution from our international markets with a successful launch in Germany and named patient sales in other countries, including France. Our combined product sales for ONPATTRO and GIVLAARI were $77.5 million for the quarter, representing 6% growth versus Q1, a strong result given the challenges associated with COVID-19 in the quarter. Turning now to a summary of our full P&L results for the quarter. Net revenue from collaborations for the second quarter was $26.4 million, a significant increase from last year primarily due to revenue recognized from our Regeneron and Vir collaborations. Gross margin as a percentage of total revenue was 81% for the quarter, down from 90% in Q2 2019 primarily due to the current utilization of ONPATTRO full cost inventory. Last year benefited from 0 cost ONPATTRO inventory as well as having a higher proportion of sales in the second quarter of 2020 coming from lower-margin international markets and a write-off of ONPATTRO inventory at our contract manufacturer. Our R&D expenses decreased on a non-GAAP basis in the second quarter of 2020 compared to the same period in the prior year primarily due to nonrecurring expenses in 2019 from license fees related to the execution of our collaboration agreement with Regeneron as well as a decrease in expenses associated with material manufactured for clinical trials. Conversely, SG&A expenses increased modestly on a non-GAAP basis in the second quarter of 2020 compared to the same period in the prior year primarily due to increased investment in commercial and medical affairs activity to support the ongoing launches of ONPATTRO and GIVLAARI and initial launch preparation activities for lumasiran. Importantly, our non-GAAP operating loss for the second quarter decreased by approximately $40 million compared with the same period in 2019 driven by a combination of strong top line growth and very moderate growth in operating expenses. We remain confident that 2019 represents our peak non-GAAP operating loss year as we expect the trend of strong top line growth and moderate growth in operating expenses will continue for the balance of the year. We ended the quarter with cash and investments of $1.95 billion, which includes $600 million in proceeds received in the second quarter from the partial sale of future inclisiran royalties and issuance of common stock to Blackstone. Finally, turning to our financial guidance. We believe our results for the second quarter demonstrate the strength of our commercial teams in challenging circumstances. As a result of the strong commercial performance for ONPATTRO that exceeded our initial expectations back in the earlier phase of the pandemic in May, we are further revising our full year revenue guidance for ONPATTRO, with an increase in the midpoint of our guidance as we narrow the range from $270 million to $300 million to $280 million to $300 million. Guidance range for combined non-GAAP R&D and SG&A expenses as well as our guidance for net revenue from collaborations remain unchanged. Please note that we have revised the midpoint of our GAAP combined R&D and SG&A operating expense guidance downward by $25 million, reflecting a reduction in expected stock-based compensation during the year. Regarding cash, we believe our strategic financing collaboration with Blackstone, adding up to $2 billion in cash, secures Alnylam's bridge toward a self-sustainable financial profile without the need for future equity financings. And with that, I'll now turn the call over to Yvonne to review our goals for the remainder of the year. Yvonne? Thanks, Jeff, and hello, everyone. Looking ahead to the second half of 2020, we have a number of important milestones lined up. Of course, we plan to continue our global commercialization of both ONPATTRO and GIVLAARI, and we're looking forward to our GIVLAARI launch in Brazil and an upcoming NDA filing for GIVLAARI in Japan. We're also expecting two additional regulatory approvals by the end of the year for lumasiran and inclisiran. We plan to continue enrollment in our ATTR cardiomyopathy studies, specifically APOLLO-B with patisiran and HELIOS-B with vutrisiran. With lumasiran, we're on track to share top line results of the ILLUMINATE-B Phase III study in mid-2020. And of course, we'll also continue advancing the rest of our pipeline as well as exciting preclinical efforts, and we'll highlight these milestones throughout the year as they occur. Among these will be our presentation of additional clinical results from the ongoing Phase I trial of ALN-AGT in hypertension program we're very excited about. We also plan to initiate a Phase I trial of ALN-HSD for NASH, having now filed the CTA for that program. And our partner, Regeneron, plans to initiate a Phase I study of cemdisiran in combination with pozelimab, having now filed the CTA for that study. We also hope that you'll join us for our remaining RNAi roundtables focused on lumasiran, givosiran and our TTR programs later in August and September. Let me now turn it back to Christine to coordinate our Q&A session. Christine? Thank you, Yvonne. I just wanted to quickly acknowledge, we found issue with Barry's prepared remarks. There are some storms that are rolling through his area that impacted the audio quality, and we will plan to have Barry rerecord his remarks for the replay of this call. | 1 | 0.2% | |
| Good morning and welcome to the Kroger Co. second-quarter 2020 earnings conference call. [Operator instructions] I would now like to turn the conference over to Rebekah Manis, director of investor relations. Please go ahead. Thank you Gary. Good morning and thank you for joining us. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings that Kroger assumes no obligation to update that information. Our second-quarter press release and our prepared remarks from this conference call will be available on our website at ir.kroger.com. This is obviously an unprecedented time, and we are taking the additional step of providing more details on current business trends this quarter, so our prepared remarks may run a little longer than normal. After our prepared remarks, we look forward to taking your questions. Thank you Rebekah. Good morning everyone, and thank you for joining us. With me today to review Kroger's second-quarter 2020 results is chief financial officer, Gary Millerchip. Each day, I'm inspired by the work our incredible associates do to bring to life our purpose, to feed the human spirit. I am proud of our dedicated associates who are serving our customers when they need us most. Our top priority is to provide a safe environment for associates and customers, and as the pandemic continues, we know that Kroger will continue to rise to meet the challenge. Six months into the pandemic, while there is still much we cannot predict, we still -- we have a greater clarity in many areas across the business. Since March, we have invested more than $1 billion to both reward our associates and to safeguard them and our customers through implementation of dozens of safety measures. The company's total COVID-19 incident rate continues to track meaningfully below the rate in surrounding communities where we operate. We have learned and continue to learn a lot while keeping our stores and supply chain open and serving America during the pandemic. We continue to play a key role in addressing the critical need to expand COVID-19 testing. The Kroger Health team facilitated more than 150,000 COVID-19 tests at walk-up and drive-thru locations across the country. Recently, Kroger Health announced the expansion of COVID-19 testing offerings at more than 222 little clinic locations. As the nation prepares to enter the flu season, testing will become even more critical to help diagnose COVID-19 amid potential similar symptoms. We announced earlier this week a comprehensive flu shot program designed to help Americans get their recommended vaccines during the COVID-19 pandemic. Despite the pandemic-related challenges, we delivered extremely strong results in the second quarter. Customers are at the center of everything we do, and as a result, we are growing market share. Kroger's strong digital business is a key contributor to this growth as the investments made to expand our digital ecosystem are resonating with customers. Our results continue to show that Kroger is a trusted brand, and our customers choose to shop with us because they value the product quality and freshness, convenience and digital offerings that we provide. While we delayed certain cost-saving initiatives in the first quarter, as of the close of the second quarter, we are back on pace to achieve them. I continue to be proud of the way our associates have adapted and adopted to the new ways of working during the pandemic to continue to achieve strong results. We are more certain than ever that the strategic choices and investments made through Restock Kroger to execute against our competitive moats, fresh, our brand, personalization and seamless, have positioned us to meet the moment. We are also positioned to deliver 2020 and beyond for our customers, associates and shareholders as we believe a number of impacts of COVID will be structural and lasting. Our data insights show customers are rediscovering their passion for cooking at home and have an aspiration to eat more healthy foods as a result of COVID. When we talk to our customers, they tell us they plan to continue to prepare and eat more meals at home. As children return to school, many families are telling us they plan to make breakfast in the morning and prepare lunch for their children to take school. As we talk to other companies across America, we believe return to work will look very different with many employees working part of the week from home. And finally, while the full economic impact of COVID-19 is yet understood, our data shows that during the periods of lower economic activity, we see a structural shift from food consumed away from home to food consumed at home. All of these factors combined lead us to believe there will be more meals eaten at home or prepared at home for the foreseeable future. Now, I'd like to walk you through some examples of how our competitive moats have positioned us for growth in the short and long term. Even before the pandemic, our digital business had become a tailwind. The pandemic certainly has accelerated customer preference for seamless offerings. Our customers are increasingly turning to our e-commerce solutions for their grocery and household essential needs. Many of our customers are ordering groceries online for the first time as a result of COVID-19, and the majority of them tell us they plan to continue to do so in the future. Kroger began investing in digital several years ago to build a seamless ecosystem that would deliver anything, anytime, anywhere. As a result, we have over 2,100 pickup locations and 2,400 delivery locations, reaching 98% of our customers with a seamless customer experience that combines the best of our physical stores with digital. Kroger was the first to integrate pickup and delivery into one seamless experience. These investments were especially timely as customer adoption of pickup and delivery has grown significantly during the pandemic. Kroger's digital ecosystem continues to expand and customers are increasingly engaging with us. For example, Home Chef is growing incredibly fast, no doubt accelerated by the food at home trend that we believe is a structural change. We also announced that Kroger Ship will expand to offer an extended ship-to-home assortment through a marketplace offering of third-party sellers. We will continue to expand our ecosystem over time. The Kroger technology and digital team continues to create innovative experiences that are changing the way we serve customers across America and was recognized for the third consecutive year as the best place to work in IT by Computerworld. This recognition is awarded to companies that have innovative industry-leading workspaces offering a great customer associate experience. As a result of the pandemic, we continue to see a slow return to normal from the shutdown period resulting in fewer customer visits but increased basket size. Customers across the country are still staying home and cooking at home that is now part of their new routine. This makes our leadership position in fresh an even more important sales driver for Kroger. Customers rank our fresh departments higher than all of our big box competitors, and our fresh departments generated strong identical sales in the second quarter and gained market share. Our brands is also a key competitive moat for Kroger. We continue to meet the diverse needs of our customers with significant growth across the three largest brands. Our customers are eating more at home and we are seeing some customer segments trade up to the larger pack sizes as well as more premium quality foods and natural and organic foods. Our larger-sized big pack platform is up well over 50%. Private selection is up over 17% and Simple Truth is up over 20% in the second quarter. Our brands continues to tap into emerging trends and evolving customer needs, delivering new flavors and innovative new items like the new plant-based Emerge grinds and patties which launched in late 2019. A recent third-party industry study reconfirmed that Simple Truth is the most-loved natural and organic brand in the U.S. Simple Truth significantly outperformed competitors on strength of brand which is a combination of awareness, willingness to recommend and strength as the driver of store selection. In continuing to exceed our customers' expectations of value and quality while also consistently delivering innovative new items our customers love, our brands remain one of our most powerful competitive advantages. Finally, personalization and data remains one of Kroger's key and core competitive moats. We use our data to understand what is most important to our customers and continued to offer promotions throughout the quarter. And we think it is an important component to continue to support as the pandemic continues and government stimulus benefits have expired. Many of our customers are experiencing some form of financial hardship that we expect to impact discretionary purchases and eating out. This is one of the unique capabilities of the Kroger ecosystem we can deliver for both customers on a budget and customers who are trading up to premium products and/or larger sizes. Turning now to partnerships. While COVID-19 has not necessarily changed how we think about our approach to e-commerce, it has accelerated our thinking about how our full evolution of seamless strategy, inclusive of Ocado. Ocado is a strategic partner of choice, delivering innovation and best-in-class experience and economic advantage through efficient fulfillment. We are confident the future of our ecosystem will incorporate a mix of capabilities and facilities ranging in sizes, and our network will flex as demand matures and the optionality will allow us to fulfill same-day or next-day delivery or pickup and customers or store replenishment. Ocado's model incorporates state-of-the-art automation and AI to expand Kroger's products to a larger footprint. And our model to deliver to customers is significantly less costly than our existing model. We are on track to open the first two sites in the spring of 2021. Developed talent is a driver of Restock Kroger, and we work extremely hard to ensure that we have the right talent, teams and structure and the right focus areas in our core supermarket business and our alternative profit businesses. We are focused on both developing, training and promoting internal talent and hiring external executives, both food industry and technology which together drives our retail supermarket business and all of our businesses. Kroger has been investing to raise wages of our frontline associates for the last several years. As part of Restock Kroger announced in 2017, over the period of 2018 to 2020, Kroger will have invested an incremental $800 million in associate wage increases, and that is $300 million more than the original plan. As a result of this continuing investment, Kroger has increased its average hourly rate to over $15 per hour. And with our comprehensive and best-in-class benefits including healthcare, paid time-off and retirement plans, our average hourly rate is over $20. As the largest traditional grocery retailer in America, Kroger is committed to being a force of good in the communities we serve. Our purpose to feed the human spirit continues to guide how we operate our business, care for our communities and deliver value to all of our stakeholders. Last month, we released our 2020 ESG report, highlighting progress toward our sustainability goals. We are committed to continuing to integrate ESG metrics into our business strategy, driving shared value for our associates, customers, communities and company. We recently made the decision to contribute an additional $20 million split evenly between The Kroger Co. Foundation and the Zero Hunger Zero Waste Foundation. We also added $5 million to a fund created to support the advancement of racial equity and justice. We believe that it is vitally important to get resources to our communities as they continue to face hardships related to the pandemic, the economic downturn and racial injustice. Under Restock Kroger, we have made significant investments to establish a seamless digital ecosystem, strengthen our brands and our personalization capabilities and to enhance product freshness and quality. These investments, combined with how our associates have responded to the pandemic and customers eating more meals at home, give us confidence that Kroger's performance in both 2020 and 2021 will be even stronger than previously anticipated. I will now turn it over to Gary for more details into the quarter financials. Gary? Thanks Rodney, and good morning everyone. Before getting into our business results, I wanted to echo Rodney's comments from earlier and say how extremely proud I am of our associates for continuing to serve our customers and communities throughout the pandemic. We remain committed to investing to ensure a safe environment for our associates and customers, and we will also continue to use our customer insights to invest in delivering greater value for customers in ways that are most relevant today and that build future loyalty. Results for the second quarter were strong and reinforce the strategic investments we have made over the last several years as part of Restock Kroger. The quarter turned out much better than we previously expected. This was due to several factors including stronger sales results and disciplined balance between cost savings and investments while also managing cost inflation volatility in key fresh categories. Additionally, fuel performed better than predicted, and we were very pleased with our alternative profit results which rebounded from COVID-19 impacts more quickly than anticipated. Now, I'd like to provide further detail on second-quarter performance. We delivered an adjusted EPS of $0.73 per diluted share, up 66% compared to the same quarter last year. Kroger reported identical sales without fuel of 14.6% during the second quarter. Sales momentum continued from the first quarter with identical sales without fuel in June and July trending in the mid-teens. During our final period of the quarter which runs from mid-July to mid-August, identical sales without fuel were 12.5% as we saw reduced government stimulus and SNAP funding and lower back-to-school activity. Digital sales grew 127% and contributing 4.4% to identical sales without fuel. New customer engagement and with our pickup and delivery services continued to grow and we continue to invest in the customer experience. This included offering fee-free pickup to provide more value for our customers in ways that are most relevant at this time. Our digital sales growth was profitable on an incremental basis, and we were pleased with the progress we made to improve profitability by reducing the cost to fulfill a pickup order during the quarter. We see a clear path to further improve digital profitability by leveraging our personalization tools to improve sales mix, continuing to reduce cost to fulfill an order via process improvements and automation and accelerating growth in media revenue generated from digital sales. Adjusted FIFO operating profit for the second quarter was $894 million, up 43% compared to the second quarter of 2019. We were pleased with the overall pass-through rate achieved from the elevated sales in the quarter which including the impact of digital growth and incremental costs associated with COVID-19, was approximately 10%. COVID-related cost investments in associate depreciation, cleaning, safety and supply chain totaled approximately $250 million in the quarter. Gross margin was 22.8% of sales for the second quarter. The FIFO gross margin rate excluding fuel, increased 5 basis points primarily driven by sourcing efficiencies, sales leverage related to shrink, transportation and advertising costs plus growth in alternative profit streams. This was partially offset by price investments as we continued to invest in delivering greater value for customers and mix changes from lower relative sales in higher gross margin categories such as deli bakery. The OG&A rate excluding fuel and adjustment items, decreased 61 basis points due to sales leverage and execution of Restock Kroger initiatives partially offset by ongoing COVID-19 related costs mentioned earlier to protect the health and safety of our customers and associates. Rent and depreciation excluding fuel, decreased 27 basis points due to sales leverage. We were very pleased with the progress on our Restock Kroger savings initiatives in the quarter and now expect to achieve the targeted $1 billion of savings in 2020. Fuel remains an important part of our strategy to drive customer loyalty. Compared to the first quarter and consistent with market trends, the decline in gallons slowed to around 15% in the second quarter. We remain well positioned with our markets due to our fuel procurement practices and market-leading reward program. The average retail price of fuel was $2.14 this quarter versus $2.71 in the same quarter last year. Our cents per gallon fuel margin in the second quarter was $0.37 compared to $0.35 in the same quarter last year. While fuel operating profit was $30 million lower than the same quarter last year, this was better than expected. For the remainder of 2020, we expect fuel profitability will continue to be a headwind compared to prior year as we cycle margins from 2019 and gallons continue to be impacted by COVID. Kroger's alternative profit model is built on a platform of leveraging supermarket traffic and data, with media and Kroger Personal Finance representing the largest contributors to growth in 2020. Thanks to our team's responsiveness to the challenges COVID has presented to our alternative profits portfolio, these businesses rebounded strongly in the second quarter, and we now expect growth approaching $100 million for the fiscal year 2020. We continue to believe alternative profit will be a major accelerator of our model in the future, and COVID-19 has not changed the long-term profit expectations previously shared as part of Restock Kroger. Kroger precision marketing drove tremendous acceleration in our media business in the second quarter. On the strength of growth in digital sales, digital customer engagement and new inventory, revenue growth doubled compared to the first quarter. In-store media also bounced back as stay-at-home orders were lifted in many of the communities we serve. Kroger Personal Finance experienced higher transactions in the second quarter compared to the first quarter as customer activity improved in gift cards, lottery and money services. While trends at KPF are improving, we continue to expect KPF profit will be lower than our original expectations for 2020 due to COVID-19. We continue to invest in our associates as a key part of Restock Kroger in a variety of ways including investments in wages, training and development. As you know, for the last decade or more, Kroger has sought opportunities to address the funding challenges facing the pension plans in which our associates participate. We believe challenges related to pension funding can be mitigated if plans are reviewed and addressed over time. Consistent with this effort, last month, we announced a tentative agreement to improve security of future retirement benefits of over 33,000 Kroger family of company associates across 20 local UFCW unions with an investment of nearly $1 billion. Ratification of this agreement is still expected to occur in the third quarter of 2020. We ratified new labor agreements with the UFCW covering associates in Roanoke during the second quarter. We are currently negotiating with the UFCW for contracts covering store associates in Las Vegas, Little Rock, Houston, Dallas and Charleston, West Virginia. Looking ahead, toward the end of this year, we will be negotiating with the UFCW for Fry's stores associates in Arizona. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable healthcare and retirement benefits for our associates. We strive to make our overall benefit package relevant to today's associates. Our financial results continue to be pressured by healthcare and pension costs which some of our competitors do not face. We continue to communicate with our local unions and the international unions which represent many of our associates on the importance of growing our business in a profitable way which will help us to create more jobs and career opportunities and enhance job security for our associates. Turning now to financial strategy. Kroger's financial model has proven to be resilient throughout the economic cycle. We continue to generate strong free cash flow and maintain strong liquidity. We are committed to investing in the business to drive profitable growth, maintaining our investment-grade debt rating and returning excess free cash to investors via share repurchases and a growing dividend over time. We remain confident in our business model and our ability to achieve consistently attractive total shareholder returns. We will provide more color on our future approach to capital allocation and the use of excess cash during our March 2021 investor day. In 2020, we are being disciplined in how we deploy capital, and all aspects of our capital plan are being evaluated to make sure that our investments will deliver strong returns and position Kroger for long-term success post COVID-19. We now expect total capital expenditure to range between $3 billion and $3.4 billion in 2020. We have widened the range of our guidance due to the uncertainty on timing of when spend will occur because of COVID-19. Kroger's net total debt to adjusted EBITDA ratio is 1.7 compared to 2.46 a year ago. This is below our target range of 2.3 to 2.5. Kroger held temporary cash investments of approximately $2.4 billion as of the end of the quarter reflecting improvements in operating performance, significant improvements in working capital and delayed tax payments as a result of the CARES Act. We expect working capital to improve for the year although not to the level experienced year-to-date which is inflated by sales growth due to COVID-19. During the quarter, Kroger repurchased $211 million of shares under its $1 billion board authorization announced on November 5, 2019. On September 11, 2020, the board of directors authorized a new $1 billion share repurchase program, replacing the prior authorization. In June, Kroger increased the dividend by 13%, marking the 14th consecutive year of dividend increases. Turning now to guidance for the remainder of 2020. As we shared last quarter, the COVID-19 pandemic has changed the outlook for food retail, and we continued to monitor, evaluate and adjust our plans to address the impact to our business. While there are clearly still many unknowns, as Rodney shared in his opening comments, we now have greater clarity in many areas of our business and the drivers of food at home consumption. As a result of our strong performance in the first half of the year, the expectation of sustained trends in food-at-home consumption and confidence in our ability to execute against the Restock Kroger strategy, we are updating our full-year 2020 guidance. For the full-year 2020, we expect total identical sales without fuel to exceed 13%, and we expect to achieve adjusted EPS growth of approximately 45% to 50%. We are providing a wider range on guidance than we would normally provide at this point in the year to account for the variety of outcomes that could materialize as a result of the pandemic. In the second half of 2020, we expect identical sales excluding fuel, to continue at elevated levels, although tapering from the level we've experienced so far this year. Our guidance contemplates continued investments in the customer and ongoing COVID-19 related costs to protect the safety of our customers and associates, balanced with continued execution of cost-saving initiatives and growth in alternative profits. We expect fuel profitability will be a headwind for the remainder of 2020. Finally, relative to delivering on our total shareholder return growth targets, as shared at our November 2019 investor day, these factors also lead us to believe that our 2021 business results will be higher than we would have expected prior to the COVID-19 pandemic. As the operating environment continues to evolve, we will be transparent and communicate any important changes that could impact our outlook. I'll now turn it back to Rodney. Thanks Gary. We provided specific guidance to help you understand how we see the business today. While there are still a lot of uncertainties, we are confident in our team's ability to navigate through this. We are laser-focused on winning with the customer, and our true measure of success internally will be growing market share sustainably over time. As Rebekah said earlier, we have scheduled a call on October 27. We will provide a business update relative to our November 2019 business commitments as well as our overall ESG commitments. We value the impact of an in-person meeting with you and have made the decision to reschedule the timing of our traditional investor day to spring of 2021. We remain incredibly confident in both our business model and TSR model and believe that not only 2020 will be strong, but as Gary mentioned, 2021 will be even stronger than we previously anticipated. Now we look forward to your questions. | 1 | 0.2% | |
| Good afternoon, and welcome to Diodes Incorporated Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] At the conclusion of today's conference call, instructions will be given for the question-and-answer session. [Operator Instructions] Thursday, August 6, 2020. I would now like to turn the call over to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead. Good afternoon, and welcome to Diodes' second quarter 2020 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' Chairman, President, and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Brett Whitmire; Vice President of Worldwide Sales and Marketing, Emily Yang; and Director of Investor Relations, Laura Mehrl. Before I turn the call over to Dr. Lu, I'd like to remind our listeners that the results announced today are preliminary, as there are subject to the Company finalizing its closing procedures and customary quarterly review by the Company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the Company files its Form 10-Q for its second quarter 2020. In addition, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q. In addition, any projections as to the Company's future performance represent management's estimates as of today, August 6, 2020. Diodes assumes no obligation to update these projections in the future, as market conditions may or may not change, except to the extent required by applicable law. Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the Company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also, throughout the Company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now, I'll turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead. Thank you, Leanne. Welcome, everyone. And thank you for joining us today. Second quarter revenue was better than expected, increased 2.8% sequentially, trading by market share gain accruals all key product groups, due to improving demand and the design win momentum. Additionally, our quarter benefited from strong sequential and year-over-year growth in the consumer market for gaming console and IoT device, as well in the computing market, as our Pericom IC products continued to gain traction in high-end servers storage, data center, and notebooks, as well as in automotive applications. In fact, our come Pericom products achieved the second highest revenue quarter since the acquisition. Our solid results reflect our team's ability to maintain a high level of efficiency and the productivity, despite the market disruption at the end of day, caused by the COVID-19 pandemic. Our performance also serves as a testament to our diversified product portfolio in the end markets, as well as solid positioning with a long-standing tier one customers. Although the general market remains uncertain, we believe we will were positioned to continue gaining market share in the third quarter, and our forecast another quarter of sequential growth. In supporting of this growth, we took the initiative to view internal inventory, which also provided a level of assurance to all customers against possible surprise disruption in the shifting demand requirement due to the global pandemic. It is important to note that our distributor channel inventory was flat in the quarter and expected to be within our target range in the third quarter. In summary, I'm proud of our consistent performance and the financial result achieved during those unprecedented times. Our total solution sale approach, combined with our tested design win momentum, continues to pay dividend for our business as a trust supplier of the product to our customers. With that, let me now turn the call over to Brett to discuss our second quarter financial result and our third quarter 2020 guidance in more detail. Thanks, Dr. Lu, and good afternoon, everyone. As part of my financial review today, I will focus my comments on the sequential change for each of the line items, and we refer you to our press release for a more detailed review of our results, as well as the year-over-year comparisons. Revenue for the second quarter 2020 was $288.7 million, an increase of 2.8%, as compared to $280.7 in the first quarter 2020. Gross profit for the second quarter was $101.5 million or 35.2% of revenue, an increase of 5.9 % or 110 basis points, compared to the first quarter 2020 of $95.8 million or 34.1% of revenue. GAAP operating and expenses for the second quarter 2020 were $70.6 million or 24.5% of revenue, and on a non-GAAP basis, were $64.5 million or 22.3% of revenue, which excluded $4.4 million of acquisition related costs and $1.7 million of Board retirement costs. This compares to non-GAAP operating expenses in the prior quarter of $65.4 million or 23.3% of revenue. Total other expense amounted to approximately $4.8 million for the quarter, including $3.6 million of foreign currency loss and $2.7 million and interest expense, partially offset by $1.3 million of other income and $200,000 of interest income. Income before taxes and non-controlling interest in the second quarter of 2020 was $26.1 million, compared to $25 million in the previous quarter. Turning to income taxes, our effective income tax rate for the second quarter was approximately 17.9%. GAAP net income for the second quarter 2020 was $21 million or $0.40 per diluted share, compared to GAAP net income of $20.2 million or $0.38 per diluted share in the first quarter 2020. The share count used to compute GAAP diluted EPS for the second quarter 2020 was 52.6 million shares. Non-GAAP adjusted net income in the second quarter was $28.6 million or $0.54 per diluted share, which excluded net of tax $6.3 million of acquisition related costs and $1.3 million of Board retirement costs. This compares to non-GAAP adjusted net income of $23.9 million or $0.46 per diluted share in the first quarter 2020. EBITDA for the second quarter was $55.3 million or 19.2% of revenue, compared to $52.9 million or 18.9% of revenue in the prior quarter. We have included in the earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow generated from operations was $3.1 million for the second quarter 2020. Free cash flow was $16.5 million for the second quarter, which includes $16.5 million for capital expenditures. Net cash flow for the second quarter was a positive $283.7 million. Turning to the balance sheet, at the end of second quarter, cash and cash equivalents plus short-term investments totaled approximately $507 million. Working capital was $801 million, and long-term debt including the current portion, was $295 million. Both our cash and debt balances increased in the quarter as a result of actions we took to prepare for our pending acquisition of Lite-On Semiconductor, which is expected to close in the second half of this year. As a reminder, on May 31, we secured the financing for the Lite-On acquisition, consisting of $520 million term loan and a $150 million revolver. We were very pleased to be able to secure the $670 million credit facility at favorable terms in the midst of the COVID financial crisis. During the second quarter, we took advantage of the low interest rate environment and started drawing on our credit line to begin purchasing New Taiwan dollars as a natural hedge against the U.S. dollar, since the transaction will be funded in New Taiwan dollars. As of the end of the quarter, we had borrowed and converted the equivalent of $200 million, resulting in our debt and cash balances increasing accordingly. In terms of inventory at the end of the second quarter, total inventory days increased slightly to approximate 119 in the quarter, compared to 115 last quarter. Finished goods inventory days were 30, compared to 29 in first quarter 2020. Total inventory dollars increased $23.6 million to approximately $255.8 million, which reflects a $15.4 million increase in finished goods, a $4.8 million increase in work in process, and the $3.4 million increase in raw materials. As Dr. Lu mentioned, we took the initiative to build internal inventory during the quarter to support our expected growth in third quarter, while also providing a level of assurance to customers against possible supply disruptions related to the uncertainty associated with the global pandemic. Capital expenditures on a cash basis for the second quarter 2020 were $16.5 million or 5.7% of revenue, which remains at the low end of our target model of 5% to 9%. Now, turning to our outlook. For the third quarter 2020, we expect revenue to increase to approximately $304 million, plus or minus 3%. We expect GAAP gross margin to be 35.5%, plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 23% of revenue, plus or minus 1%. We expect non-GAAP net interest expense to be approximately $1.5 million. Our income tax rate is expected to be 18%, plus or minus 3%, and shares used to calculate diluted EPS for the third quarter are anticipated to be approximately $52.8 million. Please note that purchasing accounting adjustments of $3.3 million after tax for Pericom and previous acquisitions are not included in these non-GAAP estimates. Also not included is $2.4 million of Lite-On acquisition-related financing costs. With that said, I now turn the call over to Emily Yang. Thank you, Brett, and good afternoon. In the second quarter, revenue increased 2.8% quarter-over-quarter, which was at the high end of our guidance, primarily due to better than expected demand recovery in Asia. Looking more closely at second quarter revenue, POS was up due to strong demand in Asia, increased more than 15% quarter-over-quarter. Both North America and Europe POS was down due to the factory closure and shelter-in-place mandates that are still largely in place. Distributor inventory in terms of weeks was flat from last quarter and we remains slightly above our targeted range of 11 to 14 weeks, but we expect distributor inventory to be within our normal range in the near term. Looking at global sales in the second quarter, Asia represented 77% of revenue, Europe 15%, and North America 8%. In terms of our end market, consumer represented 27% of revenue, industrial 22%, communications also 22%, computing 19%, and automotive 10% of revenue. Now, let me review the end markets in greater detail. Beginning with automotive market, we continue to make great progress in this end market, even though the revenue was down 6% sequentially, which is still far less than the decline in the broader automotive market. Automotive revenue represented a 10% of the total revenue compared to 11% last quarter, reflecting the temporary impact of factory closures in North America and Europe, due to the pandemic. This was partially offset by the increased demand momentum in Asia, especially our Pericom products. We continue to focus on capturing additional shares with new and existing products for an expanding number of automotive applications. More specifically, we saw demand for our new products in Infotainment lighting system, battery manage system, communication equipment, power train systems, body control modules, and controllers. In the second quarter, we released the industrial first automotive grade ReDriver, supporting USB Type-C alternative mode. This device is on Qualcomm's reference designs for an Infotainment application, which is building tractions for new designs in all regions. To capitalize on the increasing demand for USB Type-C, Diodes released USB power delivery and data line overvoltage protection products, and designed in both Infotainment systems and USB chargers. We also continue to see design wins for our new release DC-DC converters, transistors, and LED drivers for in-vehicle lighting, battery management systems, e-bike, and wireless charger modules that reside in the car console for recharging personal equipment like mobile phones. Additionally, automotive grade Hall sensor product continues strong designing momentum of in Power C applications, while our Super Barrier Rectifiers, Shockley diodes and rectifier has shown solid growth momentum in new design wins with multiple automotive customers across the region. In the industrial market, we saw the greatest impact from the pandemic with the large number of customer factory shutdowns, primarily in North America and in Europe. We are making every effort to assist our customers in the ongoing global fight against COVID-19 by supporting many medical applications, including diagnostic and tomographic imaging system, such as ultrasound monitors, X-ray systems, and pulse oximeter monitors. Diodes delivered switching diodes product for personal protective equipment used by first responders and healthcare providers, so they can provide excellent care, while still maintaining their own health and safety. Similarly, our MOSFET diodes, Crystals, and Crystal oscillator has been adopted in a number of medical application, ranging from testing equipment to ventilators, especially those to fight COVID-19. We're also pleased to support green factory automation and efficiency improvement effort with our rectifier, bridge rectifier, and protection products in applications, including automated QR scanners, computer numeric control matching equipment and robotics. Diodes supported our customers on various green energy initiatives, including solar cell system, wind power generator, and the conversion to fully electric vehicles system. In addition, we saw strong momentum for many discrete products and wide VIN LDOs in traditional applications, such as elevators, power supplies, metering, security system, and DC fans. We also saw solid growth for newly released 18-volt DC-DC converter for building automation projects. In the consumer market, we continued to achieve solid growth primarily due to strong in Asia for gaming consoles and IoT devices, like intelligent vacuum cleaners and smart speakers. We also continue to secure increasing design wins for quick chargers and USB Type-C applications, even though the high-end mobile phone market has slowed. Diodes' new AC-DC charger solution are well positioned, as they are capable of supporting USB Type-C power delivering, fast-charging function, and other fast changing protocols. We have also seen strong demand for rectifier, bridge rectifiers, and standard linear and larger product in home appliance applications, like air conditioning, vacuum cleaners, smart audio systems, dishwashers, dryers, and washing machines, and automated espresso machines. Additionally, demand for larger size monitors, smart TVs, and IP phones is increasing, and as a result, Diode's been expanding tractions for SBR, Shockley, switching diodes, LED drivers, and controllers, automatize for monitor and TV backlight applications. Turning to the communication market, as I mentioned previously, smartphone demand has slowed considerably, as a result of pandemic, contributing to the revenue being down both sequentially and year-over-year. However, video conferencing needs and demand has increased dramatically, as business travel, education, institution, conferences, concert, and exhibition has become virtual globally. In the high vertical area, PCI Express 2.0 Packet switches are being deployed at the endpoint expansion associated with AI, video, and networking processors. We also saw a wide range of USB Type-C switching and video switching demand for the video conferencing hardware. Additionally, the global rollout with 5G network is beginning to create a substantial increase in demand for our TVS and MOSFET products. Speed upgrades and increasing bandwidth needs are also driving demand for 80-volt to 150-volt performance PMA and 100-volt to 150-volt Ultra-Low RDSL MA in 5G Power Station to save power consumption. Diod saw momentum in both of these areas in the quarter. Our small-size low capacitance in TVS product in the small CFM package provide best-in-class search performance for Gigabit Ethernet based PoE application. Similarly, the smartphone market requires components with same package offer high efficiency and high performance, since power density is a key requirement. Diodes' products are well suited for this requirement, and we continue to launch new products, leveraging our wafer design, combined with DSM the CSP packaging technology. Our state-of-art MOSFETs for the low switch and battery protection applications are seeing increasing designing activities. In addition, CSU package SBR Shockley product experienced further uptake in battery pack during the quarter. Our Class-C audio amplifier products family has also received multiple design wins in the monitor market for audio application. Additionally, we are seeing increasing demand for high-performance, low switch, with new design wins and volume production in software and PPA applications. Newly released 18-volt DC-DC converters, timing, TVS, and bipolar power transistors are capturing design wins in the networking applications router, switch, and RF antennas. Lastly, in the computing market revenue increased, as work-from-home mandates drove stronger demand for notebook, motherboard, server, and storage applications, in particular for our Pericom product family. As Dr. Lu mentioned, our Pericom product reached the second highest revenue quarter since the acquisition. In fact, our Clock IC Internet ASIC product reached a record high in the quarter. We also secured a number of new design wins for our high-current LDO product family, power switches, SBR, Shockley product in PC, projector, USB PD, and ATS power applications. The computing segment also continued to drive solid demand for TVS, rectifier, and bridge rectifiers product in display and power supply applications. The power PD 333 package MOSFET, and revenue from this device is also picking up significantly, along with a demand for 600-volt MOSFETs. In summary, our second quarter results once again demonstrated the resilience of our business and the team's ability to effectively manage through the current environment. We are well positioned with customers and have strong design win momentum across a broadened product portfolio that continues to drive increasing market share and consistent growth for our business. With that, we'll now open the floor to questions, operator. | 1 | 0.2% | |
| Ladies and gentlemen, thank you for standing by, and welcome to the Noble Corporation plc second-quarter 2020 results. [Operator instructions] I would now like to turn the conference over to your speaker for today, Mr. Craig Muirhead, vice president of investor relations and treasurer. Thank you, and welcome, everyone, to Noble Corporation's second-quarter 2020 earnings conference call. We appreciate your continued interest in the company. You can find a copy of Noble's earnings report issued yesterday evening along with the supporting statements and schedules on our website at noblecorp.com. For today's call, we will not have a question-and-answer session at the end of the prepared remarks. Before I turn the call over to Robert Eifler, I'd like to remind everyone that we may make statements about our Chapter 11 filing, restructuring, activities or plans, operations, opportunities, plans, operational or financial performance, the drilling business or other matters that are not historical fact, and are forward-looking statements that are subject to certain risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission, which are posted on our website discuss the risks and uncertainties in our business and industry, and the various factors that could keep outcomes of any forward-looking statement from being realized, including resolution of our Chapter 11 cases, our ability to consummate our restructuring as contemplated, the impact of COVID-19 pandemic on Noble's operations, the price of oil and gas, customer demand, operational, and other risks. Our actual results could differ materially from these forward-looking statements and Noble does not assume any obligation to update these statements. Thank you, Craig. As previously announced, on July 31st, Noble filed for Chapter 11 protection under the U.S. Bankruptcy Code. This was not a decision we made lightly or without evaluating a number of potential alternatives. We ultimately determined that a comprehensive restructuring path, best positioned at Noble, to meet the challenges we face in the current environment. And to create a strong and appropriate financial foundation to support our industry-leading operations. We have signed a restructuring support agreement with several of our largest bondholders that plan to convert our bonds into equity in the reorganized company. And those bondholders have committed to invest an additional $200 million in the company. Additionally, a steering committee of our existing bank lenders has agreed in principle to a new $675 million revolving credit facility with our existing bank group. We also have had discussions with the Paragon Litigation Trust, which we think is the right path to get to a resolution of this case, hopefully, soon. While there is clearly work that remains to be completed before we emerge, we are very pleased to have obtain -- to have obtained this consensual deal, and are optimistic we will navigate through the court process in a relatively expeditious manner. Given the status of our having filed for Chapter 11 and the related activities, we will not be holding a question-and-answer session on today's call, and I hope you understand our position there. It is important to stress that we remain absolutely committed to delivering operational excellence for our customers. It is our balance sheet that needs to be fixed, not the company. We plan to pay all of our employees and vendors in full while our day-to-day operations continue uninterrupted. Our legacy was built through operational excellence and customer satisfaction. While this is a significant event in our company's history, we will not lose focus on our core competencies or change the way we do business with our customers. Richard will address our restructuring again in just a moment. But first, I would like to give you an update on our operations and the good work the Noble team is doing and will continue to do around the world. As everyone knows, our industry is dealing with one of the most difficult environments we've endured in decades. I've heard the current market described as perfect storm or a double black swan event. Whatever the label, we have seen a significant disruption in our business. During the COVID-19 pandemic, our primary focus has been on keeping our workforce safe and maintaining the high operational standards that our customers have come to expect from Noble. Travel restrictions have created a challenge for crew changes with 14-day quarantine before travel to many regions or outright travel restrictions in some cases. This is difficult on our crews and their families who had to endure much longer hitches and more time away from home. We have organized quarantine procedures for the most difficult regions that allow us to crew change regularly. But the time away from home is still difficult for our crew. Our COVID-19 response team has done a great job of organizing the very complicated logistics and our offshore crews has stepped up to the challenge and done an incredible job of keeping our rigs running. I could not be prouder of the men and women of Noble, and would like to offer my thanks and appreciation for the many individual efforts that have collectively allowed us to continue operating our rigs during this most challenging of times. Far from the green shoots we were seeing as 2020 began, operator drilling plans have been flashed across the board and we expect the depressed activity level to persist well into 2021. Tender activity in the second quarter was down 50% from Q1 and offshore rig contractors have lost $1.3 billion of backlog since March due to contracts being early terminated or canceled prior to start. While the slope of the recovery remains unclear, offshore exploration and development remains a key component in the global and the supply of global oil. With a growing number of rigs coming out of the global rig fleet, we believe the supply demand dynamics will be more favorable coming out of this downturn than the previous downturn. And during the trough, the best properties will still be drilled, such as those in the Guyana-Suriname basin, where another significant discovery was announced last week. Despite the very challenging backdrop, Noble has continued to outperform the market with respect to marketed utilization. In our floating fleet, the drillship Noble Sam Croft is currently working on a very successful program for Apache and Suriname. And we will complete our contract there in the fourth quarter. I'm excited to announce that earlier this week, ExxonMobil awarded the Noble Sam Croft, a new six-month contract to drill offshore Guyana. With operations commencing in the fourth quarter of 2020 after the rig finishes its current program. This contract was awarded under the previously announced commercial enabling agreement established with ExxonMobil earlier this year. We did experience a temporary pause on the Noble Tom Madden due to COVID-related travel restrictions, but returned to full day rate in early June. So with this award, all four of Noble's high-specification HHI drillships will now be contracted to ExxonMobil in Guyana, expanding our relationship with a valued client in one of the world's most exciting deepwater basins and deepening our footprint in this emerging region. Gulf of Mexico drillship utilization has dropped by about 20% as contracts roll over with few new opportunities, but still has a stable base of long-term contracts. Also, while rates are trending downward, early indications reveal they are holding up better than 2016, 2017 lows. Our two rigs in the region, the Noble Globetrotter I and Globetrotter II remain on contract with Shell into 2022 and 2023, respectively. The Noble Clyde Boudreaux has been impacted by the market conditions with the cancellation of its previously announced contract in Vietnam. We are bidding into multiple opportunities now, but the rig will see some downtime and is currently mobilizing to Malaysia for warm stacking. Five of our floaters are currently cold stacked and not marketed. We are evaluating options for these units, including selling or scrapping, and we'll closely manage any spending related to our cold stacked rigs. Turning to our jackups. In the North Sea, outside of Norway, the spending outlook has dropped 21% this year as operators review, cancel, or defer their work scopes. Four of our jackups rolled off contract between March and April, which was a challenging time to be looking for work. The Noble Hans Deul and Noble Houston Colbert remain warm stacked. But the Noble Sam Hartley and the Noble Sam Turner received two of only four contract awards outside of Norway since the conclusion of the first quarter. These contracts position the rigs very well for follow-on work in the region. The Norwegian market has gotten a boost through a recently passed tax relief package by the government. Project sanctioned before the end of 2022 will benefit from the new tax measures, resulting in meaningful improvement to project economics, and we expect new projects to be fast-tracked on the Norwegian continental shelf over the next two years. The Noble Lloyd Noble has performed extremely well on the Mariner platform in the U.K. sector, supporting our discussions for follow-on work. The rig is in one of the most tech -- is one of the most technologically advanced in the world, and we remain hopeful that we will be able to secure incremental work following its current contract. In Australia, jackup demand fell to one rig in the quarter. Fortunately, for us, it was a Noble Tom Prosser, which did experienced a period of COVID-related standby time but went back on full day rate in mid-July. We are currently chasing several opportunities for work -- follow-on work in the country. Our last fleet status report disclosed an extension for the Mick O'Brien in Qatar until November. We are hopeful the exceptional operational performance will lead to additional work in the country. Saudi Aramco has suspended the Noble Scott Marks, which began its one-year standby period on May 10th. This suspension is not a reflection on the rig's performance but rather Aramco's global response to the change in oil prices. We have also agreed to a day rate reduction on the Noble Roger Lewis, which will put the day rate at $139,000 per day effective from April 1st, 2020, through the end of 2021. The day rates for the Noble Johnny Whitstine and Noble Joe Knight remain unchanged. Despite the challenges, we continue to perform very well for Aramco. Earlier this year, the Noble Roger Lewis received recognition from Aramco for successfully delivering a well 64 days ahead of schedule and with the lowest recorded lost time percentage of 2.95%. We are pleased to deliver this type of performance to a valued long-standing client in Saudi Aramco. The Regina Allen is finishing its program in Canada and will move to Trinidad and Tobago to start work there in September. We expect the efficiencies of the JU-3000 in design to compete well in the Trinidadian market, providing an opportunity for follow-on work in the region with broader market recovery. I'll now turn the call over to Richard to give an update on our financial results and more details on our restructuring process. Thank you, Robert. Good morning, everyone. I would also like to welcome each of you on today's call, and thank you for joining us. I will start my comments with some highlights of our second-quarter results and then give an overview of our restructuring support agreement and what we are trying to achieve through this process. As announced yesterday, Noble concluded the second-quarter 2020 with a net loss attributable to the company of $42 million or $0.17 per diluted share on total revenue of $238 million. Our EBITDA in the second quarter was $58 million after adjusting for prepetition charges for professional fees related to our Chapter 11 filing and an increase in legal contingencies related to ongoing litigation. This compares to EBITDA of $91 million in the first quarter. Our contract drilling services revenues were down $47 million from the first quarter to $220 million in the second quarter. This is due to a number of rigs rolling off contracts in late first quarter and early second quarter. However, we are focused hard on managing costs closely with contract drilling costs being reduced $17 million quarter over quarter to total $144 million in the second quarter, which includes approximately $3 million of costs in the quarter related to our COVID-19 response efforts. On our last earnings call, we discussed our moves to improve efficiency and reduce our shore-based and G&A spending by $25 million on an annualized basis excluding restructuring-related costs. We are continuing to work diligently to find additional areas of efficiency without sacrificing our operational excellence. Our capital expenditure estimate for the full-year 2020 is in line with our estimates at the end of the first quarter and is expected to range between $165 million and $175 million, of which we anticipate reimbursement from our customers of between $50 million and $60 million. Additionally, we previously referenced the anticipated cash tax refund of approximately $152 million as a result of the CARES Act provisions. During July, we received roughly $134 million of this refund and anticipate to receive the remaining $18 million before the end of the year. In addition, in July, we also received roughly $19 million in refunds related to closures of certain prior-year tax audits. These tax refunds received in July bolstered our cash position at the start of the third quarter. Last week, we signed a consensual restructuring support agreement with a number of our largest bondholders that calls for the full equitization of all of our outstanding bonds, which total over $3.4 billion today. As of July 31st, approximately 70% of the aggregate principle of the 2026 guaranteed notes and approximately 45% of the aggregate principle of all our other notes, what the RSA described as our legacy notes, have signed up to support the agreements. We are very encouraged by the support we've been shown by our bondholders and banking partners in coming to this consensual agreement to recapitalize our balance sheet, which will be implemented through a voluntary Chapter 11 process. This same group of bondholders have committed to provide $200 million of new investment into the company in the form of second-lien notes with a seven-year maturity. The company will have the option to pay cash interest on the new notes, pay interest in kind, or pay some combination of cash, interest, and pick. This will further allow us to manage our liquidity and cash outflows, providing incremental flexibility to the company. We have also agreed to a term sheet in principle with a steering committee to our existing revolving credit facility lenders to provide a new five-year $675 million secured first-lien revolving credit facility, which will provide meaningful liquidity and a multi-year extension of our banking credit commitments. As a result of our current cash balance, we expect to have sufficient liquidity to manage through the duration of our bankruptcy proceedings without the need for additional financing. We currently have $545 million of borrowings on our credit facility that we anticipate will be paid in full, either through refinancing with borrowings under the new revolving credit facility or through cash paydown. At emergence, we expect to use the proceeds from the second-lien bond and any remaining excess cash to pay down borrowings under our credit facility. This will free up borrowing capacity on the new revolving credit facility and bolster our liquidity at emergence. These agreements are not final as they still require additional support from bondholders and banks, compliant with certain conditions and then approval by the court. There is more information in our 8-K filed on July 31st and additional details are being developed. Both the new first-lien credit facility and the second-lien notes are scheduled to become effective upon emergence. We currently anticipate that we will complete the Chapter 11 process and emerge as a restructured company before the end of the year. In connection with our restructuring announcement, shares of our common stock have been delisted from the New York Stock Exchange, and as of Tuesday, have been listed for trading on the over-the-counter Pink Exchange under the ticker NEBLQ. Our shares will continue to trade here until the final conclusion of our Chapter 11 cases. Upon emergence, we intend to regain listing status for the restructured company. As Robert mentioned, we spent considerable time evaluating numerous alternatives to address our balance sheet issues. The comprehensive restructuring, which we now have engaged in, will provide significantly reduced leverage and corresponding interest expense and enhanced liquidity position and improved cash flow after financing costs, which will create a much more sustainable capital structure for us as we navigate the current market conditions. I will now turn it back to Robert. Thanks, Richard. We are facing many challenges as an industry and have had to make a lot of hard choices. Restructuring is clearly a major event for our company, but it does not deter our focus to maintain our reputation and our brand. We will continue to deliver operational excellence for our customers. We will work safely and we will be good stewards of the environment. These are things that we do well and that people have come to expect from Noble, which is why we are fortunate enough to have many great relationships with discerning customers. We are pleased to have received the support of our lenders and note holders in a consensual deal. I am especially proud of the men and women at Noble who continue to deliver operational excellence for our customers every day, and I am confident that on emergence from Chapter 11, the strength of our operations combined with a solid financial platform, will position Noble to lead the industry. That concludes our prepared remarks. Thank you for your participation in our call today, and I will now turn it back to the operator to close the call. | 1 | 0.2% | |
| Good morning, and welcome to TripAdvisor Second Quarter 2020 Earnings Conference Call. As a reminder, today's conference call is being recorded. At this time, I would like to turn the conference over to TripAdvisor's Vice President of Investor Relations, Mr. Will Lyons. Please go ahead. Thanks, Catherine. Good morning, everyone, and welcome to our call. Joining me today is our CEO, Steve Kaufer and our CFO, Ernst Teunissen. Last night, after market close, we distributed and filed our second quarter 2020 earnings release and made available our Shareholder Letter on our Investor Relations website located at ir.tripadvisor.com. In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Also, on our IR site, you will find supplemental financial information which includes reconciliations of certain non-GAAP financial measures discussed on this call as well as other metrics. Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent management's views as of today, August 7th, 2020. TripAdvisor disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to our earnings release as well as our filings with the SEC for information concerning factors that could cause actual results to differ materially from these forward-looking statements. And with that, I'll pass the call to Steve. Thank you, Will, and good morning, everyone. Thank you for joining the call. As you saw from our results and described in our Shareholder Letter that we posted last night, the second quarter was one of historic proportion, given the impacts of COVID-19 pandemic is having on our business and on the travel industry. Significant year-over-year impacts persist, but we are encouraged by gradually improving trends since April. Monthly unique users on TripAdvisor sites progressed from 33% of last year's comparable period in April to 67% of last year's comparable period in July. Revenue improved from 10% of last year's period in April and May to approximately 30% of last year's comparable period in July. So while Q2 was challenging, we have emerged from our industry's darkest of days. I remain confident that while it may take time and be uneven along the way, it will eventually fully return. In the meantime, we are executing well on what we can control, streamlining our operations to preserve cash, leveraging our platform's differentiated strengths to help customers and redoubling our strategic efforts to address future opportunities and emerge in a strong position on the other side of this pandemic. Now before I turn the call over to Ernst, I want to, again, extend a thank you to all frontline workers, from medical professionals to the everyday heroes working in our local grocery stores or delivery services. And to our employees, I'm grateful for your tireless hard work during this difficult period. You have demonstrated both your talent and your resilience. I am pleased with how we have come together to execute on our important initiatives that serve our stakeholders, Ernst? Thank you, Steve, and good morning, everyone. In the face of this unprecedented uncertainty, during Q2, we took swift and concerted action to preserve cash and maintain our solid financial position. First, related to expense management, we are tracking in line with the targeted discretionary and workforce related savings levels that we discussed with you three months ago. I'll note that these cost savings I'm about to reference do not consider depreciation, amortization, restructuring and related reorganization costs as well as stock-based compensation. So specifically, our expenses were $104 million lower in Q2 compared to Q1. $53 million of this was due to variable cost, which came down roughly in line with the revenue and $51 million was from savings from previously announced discretionary and workforce related cost measures. We expect annualized savings of these more fixed, discretionary and workforce related cost will be in excess of $200 million this year versus 2019, positioning us very well as we enter 2021. The variable costs are expected to be lower this year as well, driven by reduced marketing spend and lower expected revenue but will go up again as revenue recovers. We are executing as a leaner and more focused organization now and we are pursuing our highest business priorities. We believe the steps we've taken position the business for better flow through as consumer travel demand returns and the revenue recovers. As for liquidity, we had close to $700 million of cash at the end of June. And in July, we completed a $500 million bond offering. This offering has provided us with a long-term debt capital, and together with our credit facility, ample liquidity to withstand even prolonged COVID scenarios. We believe our actions to streamline operations, conserve cash, and raise long-term debt capital have the business appropriately capitalized now and positioned for covenant compliance even in the event of a prolonged downturn. Looking ahead, significant year-over-year impacts persist and near-term visibility remains low. That said, we expect revenue declines will improve and EBITDA loss to narrow meaningfully in Q3 versus Q2. We remain cautious, but we believe we have taken the necessary steps to ensure we can emerge from this pandemic in solid financial as well as strategic shape. With that, we will open it up for your questions. | 1 | 0.2% | |
| Good morning, ladies and gentlemen, and thank you for standing by. Today's call is being recorded. I'll now turn the call over to Naji Khoury, chief executive officer of Liberty Puerto Rico. Good morning, and welcome to Liberty Latin America's second-quarter 2020 investors call. [Operator instructions] Today's formal presentation materials can be found under the Investor Relations section of Liberty Latin America's website at www.lla.com. Following today's formal presentation, instruction will be given for the question-and-answer session. As a reminder, this call is being recorded. Today's remark may include forward-looking statements, including the company's expectations with respect to its outlook and future growth prospects and other information and statements that are not historical facts. Actual results may differ materially from those expressed or implied by these statements. Additional information on factors or risks that could cause results to differ is available in Liberty Latin America's most recently filed Form 10-K and Form 10-Q. Liberty Latin America disclaims any obligation to update any of these forward-looking statements to reflect any changes in its expectations or in the conditions on which any statement is based. Thank you, Naji, and welcome, everybody, to our second-quarter results presentation. Firstly, I hope you and your families are safe and in good health. Well, for today, our running order is I'll begin by providing an update on the impact of COVID-19 across our markets and how we have been managing through it during this period using the framework I laid out in the last earnings call. Chris Noyes, our CFO, will then follow-up with a review of our financial performance and provide an overview of our capital structure, including the right offer we announced yesterday. After that, we'll get straight to your questions. As always, I'm joined by my executive team from across the region, and I'll get them involved as needed during the Q&A following our prepared remarks. As a point of housekeeping, we will both be working from slides, which you can find on our website at www.LLA.com. I'll start on Slide 4 with our key highlights. Following a strong first quarter, as anticipated, our performance in Q2 was negatively impacted by the pandemic. April was a low month. On a positive note, we started seeing improvements in May. And then in June, we had a clear plan on how to react to the challenges and how to be proactive as well in many areas. That is why even as the situation remains challenging in most markets, we have seen our business improve month over month. As a matter of fact, July is also better than June. Despite this difficult backdrop, we added 47,000 broadband subscribers and recorded net RGU growth adds in Q2. Across our markets, Puerto Rico performed particularly well, recording the best-ever quarter for RGU additions. To put this into context, normalizing for Puerto Rico size, this would have put us ahead of all U.S. peers in terms of adds. Financially, our focus has been on cash generation, and we reported adjusted free cash flow of $130 million in the quarter. This is based on seasonality through the year, as Chris will talk to, but this is undoubtedly a positive result. I want to also note that this includes continued investment to expand and upgrade our networks. We are leaning into our pieces. And finally, last week, we were excited to announce the acquisition of Telefónica's fast-growing Costa Rica mobile business. Together with Cabletica, which itself has been a great growth business for us, this combination will create a fantastic opportunity to deliver a leading converged offering in one of the region's best market. Moving to Slide 5, in an update regarding the eight focus areas I outlined last quarter. Overall, I'm very proud of what our team has achieved in a relatively short amount of time. Our primary focus throughout has been on the safety and well-being of our employees. We've been agile as an organization and adopted our work practices to enable working from home where possible while also doing as much as we can to protect our colleagues who need to be in the field as they help to deliver the connectivity services, which are vital to the communities we serve. We have lost one employee due to COVID, and the whole company mourns for that. It is not lost upon us, the gravity of what we are facing. In the next two areas, our network and commercial activities are key drivers for our future success. And I'll take you through some of our initiatives in the coming slides. Moving on to government affairs. We continue to work as partners with governments, stakeholders at all levels, making sure that they know we are here to provide critical services to their countries. This includes investments we continue to make in our networks, people, and communities. I'll cover factors such as moratorium laws where applicable in our key markets on the next slide. We are also seeking regulatory approval as we work toward closing the agreed AT&T and Telefónica Costa Rica acquisitions. We expect the AT&T deal to close in Q4 of this year. Turning to our COVID-19 planning activities. Early in the onset of the pandemic, we established a task force that carried out extensive scenario planning. I'm pleased to tell you that we are outperforming most of the scenarios the team had anticipated. This team also worked on some exciting initiatives that will drive efficiencies and improve customer experience in the future, such as zero-touch and digital interactions. I'll talk to these in more detail later in my presentation. Next, to finance and treasury. We continue to be active and successfully refinanced our BTR notes, taking our average maturity to approximately seven years. We are committed to maintaining the right balance in our capital structure. And as we look to the Telefónica Costa Rica acquisition, we took the decision to launch a $350 million rights offering yesterday. Chris will cover the rationale in more detail, but it is important to note that our board and leadership team have confirmed their intention to subscribe to the offer. And we are on track with $150 million fixed cost-reduction plan across operating costs and capex. As we said previously, in most cases, this accelerates plans we already have and should stand us in good stead as we emerge on the current crisis. Lastly, we focus on free cash flow generation, and Q2 showed that we can achieve it in a challenging environment. In terms of M&A, we are focused on closing our agreed acquisitions. We remain agile and see an attractive pipeline of opportunities in the region. We continue to look for accretive levered free cash flow per share opportunities. Finally, our board continues to be engaged to provide valuable advice and support to me and my team and, as mentioned, are fully supportive of the rights offer. On Slide 6, I wanted to provide more color on some of the challenges of COVID-19 in our key markets. We operate across a range of geographies with varying impacts experiencing each. Overall, we are seeing markets ease restrictions. However, this virus is unpredictable. We've positioned on this slide that markets moving from where we have seen the most stringent restrictions on the left to those less impacted by lockdowns on the right side of the slide. As more markets move to the right of this slide, this should provide a tailwind for the remainder of the year. Starting on the left with Panama, which has been the strictest lockdown measures across all of our markets. Since late March, movement outside the home has been severely restricted, and this has impacted all of our business lines. In addition, there is a moratorium law on bill collection. Both are easing up. We should see this fall to be better than this summer. Moving to Chile, where, again, quarantine measures continue. Here, things are not getting that much better. Chile is in the winter season. Now, sales have been impacted by the shutdown. We still have positive net adds, but this is one we are watching closely. In the C&W Islands Group, economies are typically tourism-dependent, and although it varies, the impact of the pandemic has tended to be significant. As a market for recovery, we are seeing stores now largely reopen, and there haven't been moratorium laws such as in Panama. But in the Bahamas, they went into a lockdown again this week. Like I said, this virus is unpredictable. In Puerto Rico, restrictions were relaxed, but that was reversed, and a curfew is in place until mid-August. Operationally, all of our stores have been back to regular hours. We opted into the SEC pledge to keep America connected. However, at the end of June, less than 5,000 subscribers were on our essential services plan, and we did not count them as RGUs. Lastly, to the right of the slide, in the markets where lockdown measures have been less stringent. In Jamaica, the tourism industry is slowly getting back up and running. We forced our sales teams during the first couple of months, but we are now back on the street. We have also continued investing in network expansion. Costa Rica is the final market I wanted to cover. This has been a good market for us, and there has been limited impact from the pandemic thus far. The government has done a great job with launched stimulus measures and have been proactive in dealing with the virus. Turning to Slide 7, where we've highlighted some of the network investments, innovative products, and operational initiatives we are delivering for our customers. Starting with our network investments on the left-hand side. Our industry has seen significant increases in bandwidth demand following the onset of the COVID-19 pandemic, particularly where lockdown measures have been enforced. As a result, we have responded to ensure our customers continue to receive high-speeds and good levels of service. Across our different products, we added 400 gigabits on our subsea networks. In Chile, we increased fixed network capacity by 30%. As shown in the lower chart, Chile saw the more significant spike in bandwidth consumption across our markets, partly related to the high speeds our customers enjoy. The average speed in Chile was approximately 219 megabits per second in Q2, which was a 36% increase over the prior year. In total, we added 1.8 terabits per second capacity to our network. This is about a 26% increase in our total capacity, and we did it in a four-week period. Lastly, we continue to invest in our mobile networks by increasing core capacity in Jamaica and Panama by 40% to 50%. We also worked with government partners to add spectrum to temporarily cover spikes in usage, for example, in Panama. Moving to the center of the slide. We have continued to innovate throughout this period, in some cases, even more so given the evolving market conditions. Examples I would highlight here are assisted self-installs, providing a platform to enable customers in the Caribbean to continue their education with FLOW study, WiFi optimization products, and our Google Android platform, Hub TV, which we've launched in Puerto Rico and being rolled out in other markets. Finally, on the right side of the slide, to the operational improvements, we should support our business both in the near-term and as we look to the future. Examples here include adapting to the lockdowns in our Caribbean markets with mobile and virtual stores, promoting digital payments in our markets such as in VTR and Liberty Puerto Rico, where digital payment collections by approximately 75% and 85%, respectively, in June. And for the longer term, we are working hard to make zero-touch installs work across our markets. This would be a game-changer. Turning to Slide 8. Consumers continue to demand high-speed connectivity. And our fixed-line services, which represents just over 30% of total revenue, has been particularly resilient. Starting with our RGU additions by segment on the left of the slide, cable and wireless had a strong start to the year, with a record Q1 additions but then saw weaker performance in Q2 as the lockdowns I mentioned impacted our markets to varying degrees. In Panama, we reported 45,000 RGU losses during Q2. However, this included the removal of 76,000 RGUS who we continue to provide a service to but that have not paid us in accordance with our recognition policy. These customers still have our equipment in their homes and use of our service. We believe a number of them will come back into our base as conditions improve. Jamaica is worth highlighting as the market that continues to perform well, with 26,000 RGU adds in Q2. Like Puerto Rico, this number is amazing if you normalize the base. Turning to VTR and Cabletica, we saw a solid performance in Chile overall. However, video subscribers declined in Q2, driven by the suspension of the Chilean soccer league, which we carry on a premium channel. Cabletica had another strong quarter and continues to grow as it challenges the incumbent in the Costa Rica market. Finally, to Puerto Rico, where Q2 was our business's best-ever quarter, adding 34,000 subscribers as consumers saw the value of our high-speed proposition during times of restricted mobility. At a group level, this aggregated to 19,000 net adds in Q2 and $79,000 in the first half. As you can see in the chart, the numbers were significantly impacted by the removal of 76,000 RGUs in Panama, as we discussed. On the right of the slide, I wanted to call out two important drivers for our fixed business. Firstly, broadband is a driver of growth across our group and leads our proposition. The C&W figure here would have been 20,000 higher had we included the Panama RGUs that were excluded from our subscriber comp. And secondly, we are continuing to expand our footprint with over 150,000 homes passed or upgraded in the first half of the year and over 70,000 of that number coming in Q2 during periods of restricted mobility. This is quite amazing. We are continuing to invest in a thoughtful and targeted manner. And like I said, we are leaning into our thesis. Turning to Slide 9, in our services most impacted by COVID-19, mobile and B2B. Looking first at our mobile performance on the left of the slide. At C&W, we begin to see impacts from COVID in the second half of March, and this carried into April and May, where we saw the worst of our subscriber losses. These losses were primarily due to mobility restrictions, limiting the ability of customers to access service and reduce demand for top-ups generally given the time customers spend in their homes. As you can see in the colored chart, we saw an improvement in June as lockdown restrictions eased. And this included net adds in Panama. Our momentum has continued following the quarter-end. In Chile, we saw a small impact to additions in Q2, driven by store closures related to lockdowns as well. Moving to B2B on the right, our B2B business reported a rebased revenue decline of 3% in the first half. Across our markets, this was driven by cable and wireless, where over 90% of our B2B revenue is generated. In BTR, Cabletica, we continue to build on our small market share and reported double-digit B2B rebased revenue growth. On the far right of the slide, I wanted to break out the B2B business and provide some color on the opportunities and challenges we've experienced during the pandemic. Starting with our enterprise segment, which represents approximately 50% of our revenue base. Here, we've seen opportunities to enable our clients, employees to securely work from home, as well as delivering increased bandwidth and applications. We've also been quick to support governments around their digital initiatives. Moving to SMB, which is about 25% of our revenue. We aim to be partners with our customers, helping them continue to operate through this difficult time and building on or reinforcing strong relationship for the future. Finally, we have wholesale, including our subsea business, this represents about a quarter of our B2B revenue and has been the most resilient through the first half as we've responded to increased bandwidth demands from our customers. Finally, for my section, to Slide 10, in our inorganic strategy. Last week, we announced the acquisition of Telefónica Costa Rica Mobile operations for an enterprise value of $500 million or 6 times 2019 adjusted OIBDA, including run-rate synergies. Telefónica's Costa Rica business provides a great opportunity for us in a good market, where our Cabletica fixed-line cable business has grown revenue and adjusted OIBDA by 12% and 20%, respectively, on a CAGR basis on 2017 through 2019. Through this acquisition, we will create a leading integrated player with capabilities across both fixed and mobile products and combined revenue of approximately $400 million. Being able to deliver a full suite of products is something that we value strategically. And following this and the AT&T acquisition, all but one of our markets will have fixed and mobile capabilities. Telefónica Costa Rica is the No. 2 mobile player in a three-player market. And like Cabletica, it is a challenge. From 2017 to 2019, the business delivered high single-digit top line and strong double-digit OIBDA growth. Importantly, 60% of revenues are postpaid revenues. And this business has had a successful strategy of migrating prepaid to postpaid. The business comes with a good mobile network and 90% LTE coverage by population with three-quarters of towers carrying LTE. Finally, as with more consolidation opportunities, we anticipate generating synergies from the transaction, which, together with the growth in the business, make the acquisition highly cash-generative and accretive to us. Touching on AT&T briefly, we remain very confident of completing the transaction and now expect this to take place in Q4. Through both AT&T and Telefónica Costa Rica, we are consolidating markets and generating synergies. Both also have a majority of postpaid revenues. That is why IRRs and future cash flows are good. With that, I'll now pass you over to Chris Noyes, our chief financial officer, who will take you through our financial performance. Chris? Thank you, Balan. I will begin on Slide 12, and we'll touch upon both our Q2 and half-year results. For the quarter, we delivered $849 million in revenue, reflecting a $134 million decline over Q2 2019. Roughly $60 million of the reported decrease in revenue is due to foreign-currency translation, primarily the 20% average appreciation of the U.S. dollar against the Chilean peso and the impact from the 2019 disposal of our Seychelles asset. The rebased decline of 8% principally relates to B2B and mobile. Year to date, our $1.8 billion in revenue reflects a rebased decline of 3% given we did not experience the full impact from COVID until the start of Q2. Moving to the top right, we have renamed OCF to adjusted OIBDA, albeit with no change in their definition. For Q2, adjusted OIBDA was lower as a result of an organic decrease and about a $23 million decline from a combination of foreign-currency translation and the Seychelles disposal. Our $333 million in Q2 adjusted OIBDA reflects an 8% or $30 million rebased decline year over year. For the full six months, our year-over-year rebased decline was only 2%. On P&E additions, highlighted in the bottom left, we reported $153 million or 18% of revenue in Q2 and $286 million or 16% of revenue year to date. In dollar terms, each period is lower year over year. But notably, we continue to invest in our footprint in both new build and network capacity. Finally, turning to the bottom right, we produced our best quarter ever in adjusted free cash flow with $130 million in Q2, benefiting in part from positive trade working capital and reduced cash taxes. Q2's result brings our half-year total to $81 million, which is ahead of last year's first-half results after adjusting for $67 million in insurance proceeds that we received in Q1 2019. From a phasing perspective, we would expect to generate negative free cash flow in Q3, like we did in Q1 due to the concentration of our semiannual interest payments, while Q4 tends to be seasonally strong for us with respect to cash flow. Importantly, we are well on track to deliver positive free cash flow in 2020, which we had flagged on our Q1 call as a key target for the LLA management team. On Slide 13, we present our segment results. I will focus just on Q2, which is the upper half of the slide. Starting with C&W. We generated $515 million of revenue, reflecting a 12% rebased decline. This decline was driven by a 22% rebased reduction in mobile revenue, reflecting reduced recharge activity, fewer subscribers during the lockdown period, and less roaming. Similarly, the lockdowns across our markets have impacted B2B, which had a rebased decline of 12%, although our subsea business was able to modestly grow year over year. Fixed residential was largely resilient in Q2, as it was relatively flat in terms of rebased growth year over year, with broadband the star performer. Q2 adjusted OIBDA fell by 10% in rebased terms as we generated $204 million. Compensating for the revenue decline, C&W significantly reduced both direct and operating costs on a year-over-year basis. C&W's P&E additions were $82 million or 16% of revenue and included over 50,000 new or upgraded homes during the quarter. Moving to VTR in Chile and Cabletica in Costa Rica, we posted revenue of $228 million in Q2, a 3% rebased decline. A key driver of this year-over-year decline relates to the suspension of the Chilean soccer league due to COVID, which led to discounts for our premium video customers. We experienced a 10% rebased decrease in adjusted OIBDA due primarily to two cost drivers. First, we have certain costs at VTR, including about 50% of our programming costs, which are denominated in U.S. dollars. We hedge a large portion of these costs on a near-term forward basis. The impact of the strong U.S. dollar, combined with the FX rates at which we are hedged, resulted in about an $8 million adverse impact to VTR's adjusted OIBDA on a year-over-year basis. Second, significant bandwidth demand related to COVID resulted in much higher network and call center costs to handle the unprecedented spike in Chile. Our cost in these two areas were roughly $5 million higher over Q2 2019 levels, and we expect them to improve in coming quarters. Our P&E additions were $50 million or 22% of revenue, which was slightly lower when compared to 23% of revenue in Q2 2019. Ending on the right-hand side, Liberty Puerto Rico delivered $109 million of revenue in Q2 or 5% rebased growth. This result was a modest improvement over Q1's growth levels. We realized adjusted OIBDA of $52 million reflecting growth of 2% over Q2 2019. Our growth was modestly hampered by acquisition integration costs. Finally, we reported $20 million of P&E additions or 18% of revenue as we added over 5,000 new homes to our footprint and investing in both CPE and capacity to address consumer demand and usage of our network. Turning to Slide 14. I thought it was helpful to look at how our OIBDA margin has changed since Q1. We have mitigated the impact of our sequential revenue decline by reducing costs. Both C&W and Liberty Puerto Rico maintain their margins while the decline in the VTR Cabletica margin was directly attributable to higher network and call center operating costs, together with an incremental $3 million sequential impact related to contracts denominated in non-functional currency. Overall, LLA's OIBDA margin held steady at 39% in the quarter as our direct and operating costs sequentially declined by over $50 million helping to mitigate our revenue drop. On Slide 15, I wanted to cover our balance sheet and liquidity situation in some detail, and we'll refer to the six sections on the slide. In section one, we have been very active on the financing front. Firstly, we completed an additional $90 million cap of our Puerto Rico bonds at 102.5 of par with proceeds earmarked for the AT&T acquisition, further reducing our LLA equity investment. Secondly, we monetized VTRs in the money debt derivative at the end of Q2, and we helped lead the way in opening the Lat Am high-yield market during COVID by refinancing VTR's $1.26 billion of high-yield debt in July at very attractive levels. This transaction improved our tenor, lowered our cost of capital, and added efficiency and flexibility to our structure. And thirdly, we extended near-term debt at Panama to 2025. In section two, our maturity schedule showcases the impact of our completed financing work as now 85% of our total debt is due in 2026 or later, providing stable financial footing for the long term. In Section 3, I thought it was important to walk through our cash position, excluding the $1.35 billion in restricted cash that will be used to help fund the AT&T acquisition. We finished Q2 with $1.75 billion in consolidated cash. Post Q2, we used $187 million of cash from the debt derivative as part of our uses in the July VTR refinancing, and we repaid $275 million borrowed under our RCS at C&W and Liberty Puerto Rico. The final column of the walk shows the $660 million of our cash that is allocated for the AT&T acquisition. After considering these items, that leaves us with $630 million of consolidated cash, which is a level that provides us with a prudent buffer given COVID uncertainty and a number of geographies in which we operate. Our RCF availability is to the right of the cash chart. We finished Q2 with $765 million available. And after the RCF paydown, it moves to over $1 billion available. In Section 4, as the chart depicts, we have ample cushion under our maintenance covenants in each of our three primary credit balance. Additionally, on an aggregate basis at LLA, we finished Q2 with net consolidated leverage of 4.2 times and net proportionate leverage of 4.5 times. Our longer-term target is to drive our leverage toward 4 times. In Section 5 and 6, we highlight several financings that we expect to complete in the near term. We intend to finance the acquisition of Telefonica's Costa Rica business with 4 times leverage, which equates to roughly $300 million of debt to be borrowed either locally in Costa Rica and/or at VTR Finance Holdco. With respect to the rights offering just announced, we intend to utilize this capital for acquisitions, including the equity portion of the Telefónica transaction and for general corporate purposes. As I outlined earlier, we are comfortable with our existing leverage levels and would like to bring them down modestly over time, and the rights offering provides us an additional opportunity to raise capital while not increasing our overall LOA leverage. The key terms of the rights offering include the following: Size is targeted for $350 million. The offering will commence in September. Rights will be distributed to all shareholders as of the record date. Each right will provide the opportunity to purchase a class B share at a 25% discount to VWAP, which will be set at a later date. Rights will be transferable and publicly listed and, most importantly, we have full support from LLA's executive team and board, including John Malone and Searchlight Capital, and the collective group intends to subscribe to their right. This support equates to approximately $50 million of the $350 million that we are looking to raise from shareholders. Turning to Slide 16. I will close our prepared remarks. We know, across our markets, it will take time before consumers and businesses get back to full throttle. However, our operations have stood up well so far in the face of COVID. Connectivity and entertainment through our fixed residential services and backhaul through our subsea business, provide us with a degree of consistency and resiliency in our results. I think we can all attest to our own experiences during this crisis: It is essential to have a high-speed, robust Internet connection. Controlling our costs and capex is critical. We are sticking to our plan from a quarter ago and are on track to achieve our cost- and capex-reduction targets while still investing in future growth through new build and through product and operational transformation touched upon by balance. We have more levers in our back pocket to reduce spending if needed. However, as you can see today, we remain focused on investing in our business. These efforts support our companywide focus on free cash flow generation, and our Q2 result was a quarterly record for us in this metric, a good accomplishment given the top-line challenges presented by COVID. Besides investing internally, in Q4, we expect to close the AT&T acquisition and will be working on closing the just-announced purchase of Telefonica's Costa Rica business in H1 2021. We expect the two acquisitions will add over $1 billion of annual revenue to LLA, further increasing our scale and underpinning future growth and free cash flow generation. As we look to the rest of the year and more importantly to 2021, we are taking steps within our business that we believe will enable us to accelerate out of the recovery, and the just-announced rights offering will provide us with incremental flexibility and agility should additional opportunistic situations arise. With that, operator, we are ready to take questions. | 1 | 0.2% | |
| I would now like to turn the conference over to your speaker today, Craig Stevenson, Chief Executive Officer. Please go ahead. Good morning and welcome to Diamond S' second quarter 2020 earnings call. Thanks for dialing in this morning. Before we begin the call, we'd like to draw your attention to our forward-looking statement disclaimer. We'll be making certain statements about the future events that may or may not happen in the manner which we describe. Please read page 2 in its entirety for a disclaimer about forward-looking statements. Please turn to slide 4 for a review of our operating performance. In the second quarter of 2020, our spot crude fleet earned approximately $44,215 a day, while our spot product fleet earned approximately $19,000 a day, which includes our MR tankers earning $19,425 a day. All-in TCE, which includes spot and time charters, was $40,600 a day and $18,000 a day in our crude fleet and our product fleet respectively. At Diamond S, we look at operating earnings of our fleet which we calculate as TCE less opex less G&A. We think it's important to highlight given the various ways these expenses get classified in our industry. The crude fleet generated $32,500 a day of operating earnings, while the product fleet, which includes our Handysize vessels, generated about $10,600 a day. Our reported net income was $45.7 million or basic EPS of $1.15 per share. EBITDA was approximately $84 million, and we repaid about $40 million in our revolving loans. On the lower half of the slide, you can see spot earnings volatility during the year as well as spot rates for 2019 and the 10 year range. So far in the third quarter, we've booked approximately 59% of the spot revenue days at an average rate of $25,700 a day in the crude fleet and approximately 55% of the revenue days in our product fleet at approximately $11,000 a day. The DSSI fleet is approximately 20% booked on time charters. The details of those time charters can be found in our Appendix. On slide 5, the global pandemic has led to significant crude oil demand destruction. While the chart on the left shows OPEC's latest estimate of a 10% decline from 2019 to 2020, the market environment remains highly uncertain and actual decline may be higher than that. The storage play which we talked about in the last quarter was short-lived than anticipated. Refinery capacity is still at 70% utilization. Global inventories which are estimated to be at an elevated 80 days of forward-demand is an additional headwind. In the short term, we expect to see some seasonal impacts to demand. We continue to see restraint on the tanker supply side as the graph on the right-hand side of page 5 shows an order book at 20-year lows with little supply growth across all tanker types. This is a bullish long-term signal. With the low order book, combined with [Indecipherable] demand growth is positive, particularly since demand will likely be driven from the Far East, while the production growth is largely in the West. Also, we believe to the extent that pandemic continues to linger into 2021, owners of older tanks will have tough decisions to make whether to put the vessels through another shipyard. Which brings us to the next slide, slide 6, where we present a chart that shows 7% of the Suezmax and MR fleet is older than 20 years of age. These percentages will increase at the start of the new year. There has not been a good deal of ordering this year and we believe the supply growth will remain low, not only due to the increasing age of the fleets and scrapping, but also the uncertainty of the regulatory environments and technology on new building tonnage. Tanker demand growth, as shown at the bottom of page 6, has been modified downward but it is forecast to rebound in 2021, both in crude and product tanks. While the demand for the crude oil and the refined petroleum products is not expected to rebound to 2019 levels in 2021, we expect to see incremental benefit from longer haul voyages both in crude and products. On slide 7, we show in a graph asset values relative to the 10 year average, both for Suezmaxes and MR fleet. We believe there is continued disparity in value of older tonnage, particularly on the crude side, which provides for upside potential for Diamond S and our shareholders. We expect a large fleet of middle-aged vessels can generate much better cash flows than smaller, younger fleet, especially considering the amount of capital employed to purchase assets at today's prices. This is certainly amplified by the lower bunker prices today. I'll turn it over to Kevin, our CFO, to go through the financials. Thanks, Craig. With $45.7 million in net income and $1.15 earnings per share, second quarter of 2020 was the third consecutive quarter of record earnings for Diamond S. Both our crude and product fleets generated substantial cash flows in the quarter, producing $40 million and $45 million of EBITDA respectively, more than double the results from the comparable period in 2019. On the TCE basis, for the second quarter, the spot crude fleet earned $44,000 per day; spot products fleet produced approximately $19,000 per day. Time charters booked in prior periods at lower rates brought the quarterly TCEs down on both fleets. As we discussed on last quarter's call, our crude TCE was negatively impacted by six stranded voyages whereas our Suezmax vessels were used to de facto float and storage. Our commercial team estimates this may have cost us as much as $15 million in net revenue and over $10,000 in TCE for the period. We understand this problem was faced by many owners but with 55% of our spot fleet hung up on these voyages, we believe we were disproportionately impacted. For the third quarter of 2020, we have 59% of spot crew days booked at $25,700 per day, 55% of product spot days booked at $11,000 per day. Overall third quarter product bookings have been weighed down by the Handysize vessels which were averaging just over $8,000 a day, and by [Indecipherable] positioning voyages as our vessels deliver into the Norient Product Pool. Given the rate outlook for the remainder of the quarter, we do expect to be below cash breakeven levels for the third quarter. Cash flow generation in the second quarter though was strong. We used the earnings generated by the fleet to reduce our outstanding debt, including paying down our revolving credit lines by $40 million. These amounts can be redrawn for liquidity purposes or to take advantage of market opportunities in the future. Turning to the next slide and getting into the balance sheet. The story for the quarter continued to be deleveraging. With scheduled amortization and the revolver paydowns, total debt is now $768 million, which puts net leverage on the fleet at approximately 41% based on broker values as of June 30, 2020. Working capital employed in the business declined slightly in the quarter, primarily as a result of lower bunker prices. The liquidity situation at quarter-end was strong with approximately $128 million of free liquidity available for the Company after restricted cash and bank required minimum balances. Our debt financing is entirely low cost senior secured ship loans from a syndicate of major international shipping banks. During the quarter, we entered into interest rate swaps, so we fixed approximately 25% of our future floating LIBOR exposure at just above 50 basis points, locking in a cost of debt on this amount just over 3% [Phonetic]. Moving on to the next slide and a refresh on capex. We are reiterating the same guidance that we've previously provided regarding the cost of capex events. I will note that recent projects have come in at the high end of the ranges provided given the difficulties associated with the global pandemic. Three dry docks were completed in the second quarter, and we expect two more in the second half of the year. In addition, we completed one scrubber installation in the quarter and have subsequently completed another in the beginning of the third quarter. The longer-term capex outlook has shifted as we believe that five ships initially planned for dry dock and BWTS installation in 2022 will now enter the shipyard in 2021. Additionally, we now expect the final Suezmax scrubber installation and associated shipyard work to commence in 2021 rather than the fourth quarter of 2020 as originally planned. Moving on to the next slide. Given the global uncertainty, I will again refresh our guidance on certain key cost items. Daily opex is expected to increase on both fleets in the second half of the year as we accelerate crew changes where possible and opportunistically stock and store our vessels. Depreciation and amortization remain the same as previous figures. On G&A, we expect 3Q and 4Q of 2020 to finish in the $7.5 million to $8 million total G&A range, as we have one-time costs related to overhead reduction in conjunction with the movement of ships into the pool. We will however see the benefit of these moves in 2021 when our quarterly G&A should decline to an average below $7 million per quarter. Off-hire guidance has also changed for the fourth quarter. As I mentioned on the last slide, the final scrubber shipyard has been pushed into next year. I will now turn the call back to Craig for summary. Yeah. Thanks, Kevin. Before we open it up to Q&A, we'd like to briefly summarize our priorities to this unprecedented market environment to give a sense how Diamond S is positioned and our management philosophy. First, commercial scale is critical. While we're happy with the size of our fleet, in June, we announced a strategic partnership with NORDEN whereby 28 of our MR2 product tankers will be commercially managed by the Norient Product Pool. Including ships owned by Norient and others, the pool manages around 150 tankers, and is one of the largest MR tanker operators in the world. We believe this significantly enhances our commercial side without forcing consolidation of assets. We are certainly in the position to grow our fleet, but we'll only do so under certain circumstances. We're of course focused to maintaining our low cash breakeven levels, which are highly competitive in both crude and product fleets, maintaining a lean profile, strong operating leverage in good markets, and equally important, acts as a buffer in the weak markets. And this brings us to our balance sheet. As we stated earlier, we repaid $40 million outstanding under our revolving loans in the second quarter. The net effect is to reduce our running expense, while simultaneously increasing our liquidity. Heading into what we expect will be a soft patch in the market due to the impact of COVID-19, we have total liquidity of $185 million. We also have very limited capex requirements for the balance of this year. While we expect some challenges ahead as the tanker market is impacted by the global pandemic, we believe Diamond S is well-positioned with strong liquidity, modest leverage, industry-leading breakeven levels to support the downturn and prepare for when the markets return. With natural limitations on fleet supply and the need for tankers due to regional imbalances of oil, we expect the tanker market to return to fundamental supply/demand once we work off current excess inventory build. Diamond S remains exposed to the volatility in the stock market, and we'll utilize disciplined capital allocation in order to maximize our return to shareholders, while maintaining a healthy balance sheet. With that, I'd like to open up the call to questions. Operator? | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
Frequencies of value counts
Unique
| Unique | 603 ? |
|---|---|
| Unique (%) | 100.0% |
Histogram of lengths of the category
Length
| Max length | 66996 |
|---|---|
| Median length | 19197 |
| Mean length | 20286.12438 |
| Min length | 1336 |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Consolidated Water | 1 |
|---|---|
| American Software | 1 |
| Gogo Inc | 1 |
| Stoneco LTD | 1 |
| Simon Property Group | 1 |
| Other values (598) |
| Value | Count | Frequency (%) | |
| Consolidated Water | 1 | 0.2% | |
| American Software | 1 | 0.2% | |
| Gogo Inc | 1 | 0.2% | |
| Stoneco LTD | 1 | 0.2% | |
| Simon Property Group | 1 | 0.2% | |
| ViaSat | 1 | 0.2% | |
| Jack In The Box Inc | 1 | 0.2% | |
| J.M. Smucker | 1 | 0.2% | |
| DCP Midstream, LP | 1 | 0.2% | |
| Summit Hotel Properties Inc | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
Frequencies of value counts
Unique
| Unique | 603 ? |
|---|---|
| Unique (%) | 100.0% |
Histogram of lengths of the category
Length
| Max length | 41 |
|---|---|
| Median length | 19 |
| Mean length | 19.17247098 |
| Min length | 3 |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| (NYSE:EOG) | 1 |
|---|---|
| (NASDAQ:VERU) | 1 |
| (NASDAQ:CVGI) | 1 |
| (NYSE:NIO) | 1 |
| (NYSE:AIT) | 1 |
| Other values (598) |
| Value | Count | Frequency (%) | |
| (NYSE:EOG) | 1 | 0.2% | |
| (NASDAQ:VERU) | 1 | 0.2% | |
| (NASDAQ:CVGI) | 1 | 0.2% | |
| (NYSE:NIO) | 1 | 0.2% | |
| (NYSE:AIT) | 1 | 0.2% | |
| (NASDAQ:MRCC) | 1 | 0.2% | |
| (NASDAQ:CHNG) | 1 | 0.2% | |
| (NASDAQ:SNCR) | 1 | 0.2% | |
| (NYSE:WELL) | 1 | 0.2% | |
| (NYSE:RVLV) | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
Frequencies of value counts
Unique
| Unique | 603 ? |
|---|---|
| Unique (%) | 100.0% |
Histogram of lengths of the category
Length
| Max length | 14 |
|---|---|
| Median length | 12 |
| Mean length | 11.69485904 |
| Min length | 9 |
date
Categorical
| Distinct | 34 |
|---|---|
| Distinct (%) | 5.6% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Aug 6, 2020 | |
|---|---|
| Aug 7, 2020 | |
| Aug 10, 2020 | |
| Aug 06, 2020 | |
| Aug 11, 2020 | |
| Other values (29) |
| Value | Count | Frequency (%) | |
| Aug 6, 2020 | 138 | 22.9% | |
| Aug 7, 2020 | 115 | 19.1% | |
| Aug 10, 2020 | 73 | 12.1% | |
| Aug 06, 2020 | 50 | 8.3% | |
| Aug 11, 2020 | 34 | 5.6% | |
| Aug 13, 2020 | 25 | 4.1% | |
| Aug 05, 2020 | 18 | 3.0% | |
| Aug 12, 2020 | 17 | 2.8% | |
| Aug 5, 2020 | 16 | 2.7% | |
| Aug 27, 2020 | 13 | 2.2% | |
| Other values (24) | 104 | 17.2% |
Frequencies of value counts
Unique
| Unique | 9 ? |
|---|---|
| Unique (%) | 1.5% |
Histogram of lengths of the category
Length
| Max length | 12 |
|---|---|
| Median length | 12 |
| Mean length | 11.55058043 |
| Min length | 11 |
| Distinct | 41 |
|---|---|
| Distinct (%) | 6.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| 5:00 p.m. ET | |
|---|---|
| 8:30 a.m. ET | |
| 4:30 p.m. ET | |
| 10:00 a.m. ET | |
| 8:00 a.m. ET | |
| Other values (36) |
| Value | Count | Frequency (%) | |
| 5:00 p.m. ET | 89 | 14.8% | |
| 8:30 a.m. ET | 80 | 13.3% | |
| 4:30 p.m. ET | 70 | 11.6% | |
| 10:00 a.m. ET | 58 | 9.6% | |
| 8:00 a.m. ET | 50 | 8.3% | |
| 9:00 a.m. ET | 49 | 8.1% | |
| 11:00 a.m. ET | 47 | 7.8% | |
| 11:00 p.m. ET | 18 | 3.0% | |
| 9:00 p.m. ET | 13 | 2.2% | |
| 12:00 p.m. ET | 11 | 1.8% | |
| Other values (31) | 118 | 19.6% |
Frequencies of value counts
Unique
| Unique | 12 ? |
|---|---|
| Unique (%) | 2.0% |
Histogram of lengths of the category
Length
| Max length | 13 |
|---|---|
| Median length | 12 |
| Mean length | 12.28689884 |
| Min length | 12 |
hour
Real number (ℝ≥0)
| Distinct | 12 |
|---|---|
| Distinct (%) | 2.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 7.590381426 |
|---|---|
| Minimum | 1 |
| Maximum | 12 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 1 |
|---|---|
| 5-th percentile | 4 |
| Q1 | 5 |
| median | 8 |
| Q3 | 10 |
| 95-th percentile | 11 |
| Maximum | 12 |
| Range | 11 |
| Interquartile range (IQR) | 5 |
Descriptive statistics
| Standard deviation | 2.638780617 |
|---|---|
| Coefficient of variation (CV) | 0.3476479598 |
| Kurtosis | -0.8022744395 |
| Mean | 7.590381426 |
| Median Absolute Deviation (MAD) | 2 |
| Skewness | -0.4210948455 |
| Sum | 4577 |
| Variance | 6.963163143 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=12)
| Value | Count | Frequency (%) | |
| 8 | 148 | 24.5% | |
| 5 | 97 | 16.1% | |
| 10 | 88 | 14.6% | |
| 4 | 76 | 12.6% | |
| 11 | 73 | 12.1% | |
| 9 | 69 | 11.4% | |
| 7 | 13 | 2.2% | |
| 12 | 12 | 2.0% | |
| 1 | 11 | 1.8% | |
| 3 | 6 | 1.0% | |
| Other values (2) | 10 | 1.7% |
| Value | Count | Frequency (%) | |
| 1 | 11 | 1.8% | |
| 2 | 6 | 1.0% | |
| 3 | 6 | 1.0% | |
| 4 | 76 | 12.6% | |
| 5 | 97 | 16.1% |
| Value | Count | Frequency (%) | |
| 12 | 12 | 2.0% | |
| 11 | 73 | 12.1% | |
| 10 | 88 | 14.6% | |
| 9 | 69 | 11.4% | |
| 8 | 148 | 24.5% |
| Distinct | 2 |
|---|---|
| Distinct (%) | 0.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| am | |
|---|---|
| pm |
| Value | Count | Frequency (%) | |
| am | 318 | 52.7% | |
| pm | 285 | 47.3% |
Frequencies of value counts
Unique
| Unique | 0 ? |
|---|---|
| Unique (%) | 0.0% |
Histogram of lengths of the category
Length
| Max length | 2 |
|---|---|
| Median length | 2 |
| Mean length | 2 |
| Min length | 2 |
day
Date
| Distinct | 29 |
|---|---|
| Distinct (%) | 4.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Minimum | 2020-08-05 00:00:00 |
|---|---|
| Maximum | 2020-09-24 00:00:00 |
Histogram with fixed size bins (bins=29)
adjusted_date
Date
| Distinct | 29 |
|---|---|
| Distinct (%) | 4.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Minimum | 2020-08-05 00:00:00 |
|---|---|
| Maximum | 2020-09-24 00:00:00 |
Histogram with fixed size bins (bins=29)
prev_date
Date
| Distinct | 29 |
|---|---|
| Distinct (%) | 4.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Minimum | 2020-08-04 00:00:00 |
|---|---|
| Maximum | 2020-09-23 00:00:00 |
Histogram with fixed size bins (bins=29)
next_date_x
Date
| Distinct | 29 |
|---|---|
| Distinct (%) | 4.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Minimum | 2020-08-06 00:00:00 |
|---|---|
| Maximum | 2020-09-25 00:00:00 |
Histogram with fixed size bins (bins=29)
stock_exchange
Categorical
| Distinct | 3 |
|---|---|
| Distinct (%) | 0.5% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| NASDAQ | |
|---|---|
| NYSE | |
| NYSEMKT | 1 |
| Value | Count | Frequency (%) | |
| NASDAQ | 328 | 54.4% | |
| NYSE | 274 | 45.4% | |
| NYSEMKT | 1 | 0.2% |
Frequencies of value counts
Unique
| Unique | 1 ? |
|---|---|
| Unique (%) | 0.2% |
Histogram of lengths of the category
Length
| Max length | 7 |
|---|---|
| Median length | 6 |
| Mean length | 5.092868988 |
| Min length | 4 |
| Distinct | 548 |
|---|---|
| Distinct (%) | 90.9% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Turning to Slide 11. | 8 |
|---|---|
| Turning to Slide 5. | 6 |
| Turning to Slide 6. | 6 |
| Turning to Slide 13. | 4 |
| Turning to Slide 8. | 4 |
| Other values (543) |
| Value | Count | Frequency (%) | |
| Turning to Slide 11. | 8 | 1.3% | |
| Turning to Slide 5. | 6 | 1.0% | |
| Turning to Slide 6. | 6 | 1.0% | |
| Turning to Slide 13. | 4 | 0.7% | |
| Turning to Slide 8. | 4 | 0.7% | |
| Turning to Slide 7. | 3 | 0.5% | |
| Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. | 3 | 0.5% | |
| Turning to profitability. | 3 | 0.5% | |
| Good. | 3 | 0.5% | |
| [Operator instructions] Thank you. | 3 | 0.5% | |
| Other values (538) | 560 | 92.9% |
Frequencies of value counts
Unique
| Unique | 517 ? |
|---|---|
| Unique (%) | 85.7% |
Histogram of lengths of the category
Length
| Max length | 862 |
|---|---|
| Median length | 113 |
| Mean length | 126.1227197 |
| Min length | 4 |
| Distinct | 548 |
|---|---|
| Distinct (%) | 90.9% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Turning to Slide 11. | 8 |
|---|---|
| Turning to Slide 5. | 6 |
| Turning to Slide 6. | 6 |
| Turning to Slide 13. | 4 |
| Turning to Slide 8. | 4 |
| Other values (543) |
| Value | Count | Frequency (%) | |
| Turning to Slide 11. | 8 | 1.3% | |
| Turning to Slide 5. | 6 | 1.0% | |
| Turning to Slide 6. | 6 | 1.0% | |
| Turning to Slide 13. | 4 | 0.7% | |
| Turning to Slide 8. | 4 | 0.7% | |
| Turning to Slide 7. | 3 | 0.5% | |
| Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. | 3 | 0.5% | |
| Turning to profitability. | 3 | 0.5% | |
| Good. | 3 | 0.5% | |
| [Operator instructions] Thank you. | 3 | 0.5% | |
| Other values (538) | 560 | 92.9% |
Frequencies of value counts
Unique
| Unique | 517 ? |
|---|---|
| Unique (%) | 85.7% |
Histogram of lengths of the category
Length
| Max length | 862 |
|---|---|
| Median length | 113 |
| Mean length | 126.1227197 |
| Min length | 4 |
| Distinct | 542 |
|---|---|
| Distinct (%) | 89.9% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| [0.08257218 0.66163284 0.25579497] | 10 |
|---|---|
| [0.6416891 0.02373238 0.33457848] | 6 |
| [0.04980433 0.8010077 0.14918804] | 6 |
| [0.04971392 0.79174423 0.15854177] | 6 |
| [0.04711146 0.7962827 0.15660585] | 4 |
| Other values (537) |
| Value | Count | Frequency (%) | |
| [0.08257218 0.66163284 0.25579497] | 10 | 1.7% | |
| [0.6416891 0.02373238 0.33457848] | 6 | 1.0% | |
| [0.04980433 0.8010077 0.14918804] | 6 | 1.0% | |
| [0.04971392 0.79174423 0.15854177] | 6 | 1.0% | |
| [0.04711146 0.7962827 0.15660585] | 4 | 0.7% | |
| [0.0453912 0.8260579 0.12855087] | 4 | 0.7% | |
| [0.02954477 0.83419275 0.13626249] | 3 | 0.5% | |
| [0.04190823 0.66516846 0.2929233 ] | 3 | 0.5% | |
| [0.05581466 0.76745486 0.17673044] | 3 | 0.5% | |
| [0.78514 0.01510984 0.19975014] | 3 | 0.5% | |
| Other values (532) | 555 | 92.0% |
Frequencies of value counts
Unique
| Unique | 511 ? |
|---|---|
| Unique (%) | 84.7% |
Histogram of lengths of the category
Length
| Max length | 34 |
|---|---|
| Median length | 34 |
| Mean length | 33.95024876 |
| Min length | 31 |
prediction
Categorical
| Distinct | 2 |
|---|---|
| Distinct (%) | 0.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| positive | |
|---|---|
| negative |
| Value | Count | Frequency (%) | |
| positive | 349 | 57.9% | |
| negative | 254 | 42.1% |
Frequencies of value counts
Unique
| Unique | 0 ? |
|---|---|
| Unique (%) | 0.0% |
Histogram of lengths of the category
Length
| Max length | 8 |
|---|---|
| Median length | 8 |
| Mean length | 8 |
| Min length | 8 |
sentiment_score
Real number (ℝ)
| Distinct | 542 |
|---|---|
| Distinct (%) | 89.9% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 0.09993530166 |
|---|---|
| Minimum | -0.97241306 |
| Maximum | 0.94060963 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | -0.97241306 |
|---|---|
| 5-th percentile | -0.8463359 |
| Q1 | -0.66650023 |
| median | 0.50257516 |
| Q3 | 0.68147855 |
| 95-th percentile | 0.90476686 |
| Maximum | 0.94060963 |
| Range | 1.91302269 |
| Interquartile range (IQR) | 1.34797878 |
Descriptive statistics
| Standard deviation | 0.6888955768 |
|---|---|
| Coefficient of variation (CV) | 6.893415694 |
| Kurtosis | -1.737787413 |
| Mean | 0.09993530166 |
| Median Absolute Deviation (MAD) | 0.37770879 |
| Skewness | -0.292637029 |
| Sum | 60.2609869 |
| Variance | 0.4745771158 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| -0.5790607 | 10 | 1.7% | |
| -0.75120336 | 6 | 1.0% | |
| 0.61795676 | 6 | 1.0% | |
| -0.7420303 | 6 | 1.0% | |
| -0.74917126 | 4 | 0.7% | |
| -0.7806667 | 4 | 0.7% | |
| 0.77003014 | 3 | 0.5% | |
| -0.804648 | 3 | 0.5% | |
| -0.69266313 | 3 | 0.5% | |
| 0.59218955 | 3 | 0.5% | |
| Other values (532) | 555 | 92.0% |
| Value | Count | Frequency (%) | |
| -0.97241306 | 1 | 0.2% | |
| -0.9648791 | 1 | 0.2% | |
| -0.96123654 | 1 | 0.2% | |
| -0.96046937 | 1 | 0.2% | |
| -0.9598106 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 0.94060963 | 1 | 0.2% | |
| 0.9366717 | 1 | 0.2% | |
| 0.9364947 | 1 | 0.2% | |
| 0.9345599 | 1 | 0.2% | |
| 0.93362415 | 1 | 0.2% |
next_date_y
Date
| Distinct | 29 |
|---|---|
| Distinct (%) | 4.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Minimum | 2020-08-06 00:00:00 |
|---|---|
| Maximum | 2020-09-25 00:00:00 |
Histogram with fixed size bins (bins=29)
| Distinct | 582 |
|---|---|
| Distinct (%) | 96.5% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 50.42617556 |
|---|---|
| Minimum | 0.0352 |
| Maximum | 1863.97998 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.0352 |
|---|---|
| 5-th percentile | 2.900000095 |
| Q1 | 8.93999958 |
| median | 19.20000076 |
| Q3 | 46.64500084 |
| 95-th percentile | 182.7980072 |
| Maximum | 1863.97998 |
| Range | 1863.94478 |
| Interquartile range (IQR) | 37.70500126 |
Descriptive statistics
| Standard deviation | 129.0644104 |
|---|---|
| Coefficient of variation (CV) | 2.559472516 |
| Kurtosis | 126.1098795 |
| Mean | 50.42617556 |
| Median Absolute Deviation (MAD) | 13.36000061 |
| Skewness | 10.07617175 |
| Sum | 30406.98386 |
| Variance | 16657.62204 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 7.75 | 2 | 0.3% | |
| 5.329999924 | 2 | 0.3% | |
| 13.78999996 | 2 | 0.3% | |
| 10.60000038 | 2 | 0.3% | |
| 2.720000029 | 2 | 0.3% | |
| 25.5 | 2 | 0.3% | |
| 22.47999954 | 2 | 0.3% | |
| 47 | 2 | 0.3% | |
| 4.010000229 | 2 | 0.3% | |
| 23.58 | 2 | 0.3% | |
| Other values (572) | 583 | 96.7% |
| Value | Count | Frequency (%) | |
| 0.0352 | 1 | 0.2% | |
| 0.5199000239 | 1 | 0.2% | |
| 0.5500000119 | 1 | 0.2% | |
| 0.7200000286 | 1 | 0.2% | |
| 0.9129999876 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 1863.97998 | 1 | 0.2% | |
| 1759.400024 | 1 | 0.2% | |
| 1218 | 1 | 0.2% | |
| 496.019989 | 1 | 0.2% | |
| 491.86 | 1 | 0.2% |
| Distinct | 584 |
|---|---|
| Distinct (%) | 96.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 51.98500784 |
|---|---|
| Minimum | 0.06 |
| Maximum | 1920 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.06 |
|---|---|
| 5-th percentile | 2.970000029 |
| Q1 | 9.007500172 |
| median | 20.03000069 |
| Q3 | 47.97999977 |
| 95-th percentile | 193.326004 |
| Maximum | 1920 |
| Range | 1919.94 |
| Interquartile range (IQR) | 38.9724996 |
Descriptive statistics
| Standard deviation | 131.99812 |
|---|---|
| Coefficient of variation (CV) | 2.539157451 |
| Kurtosis | 125.833557 |
| Mean | 51.98500784 |
| Median Absolute Deviation (MAD) | 13.95000069 |
| Skewness | 10.04537034 |
| Sum | 31346.95973 |
| Variance | 17423.50368 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 2.970000029 | 3 | 0.5% | |
| 25.14999962 | 2 | 0.3% | |
| 3.140000105 | 2 | 0.3% | |
| 10.47999954 | 2 | 0.3% | |
| 2.650000095 | 2 | 0.3% | |
| 11.97000027 | 2 | 0.3% | |
| 3.180000067 | 2 | 0.3% | |
| 19.38999939 | 2 | 0.3% | |
| 15.22999954 | 2 | 0.3% | |
| 10.97000027 | 2 | 0.3% | |
| Other values (574) | 582 | 96.5% |
| Value | Count | Frequency (%) | |
| 0.06 | 1 | 0.2% | |
| 0.5500000119 | 1 | 0.2% | |
| 0.5580000281 | 1 | 0.2% | |
| 0.7799999714 | 1 | 0.2% | |
| 0.9599999785 | 2 | 0.3% |
| Value | Count | Frequency (%) | |
| 1920 | 1 | 0.2% | |
| 1784.800049 | 1 | 0.2% | |
| 1235 | 1 | 0.2% | |
| 510 | 1 | 0.2% | |
| 492.6 | 1 | 0.2% |
| Distinct | 587 |
|---|---|
| Distinct (%) | 97.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 48.938911 |
|---|---|
| Minimum | 0.0352 |
| Maximum | 1863.97998 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.0352 |
|---|---|
| 5-th percentile | 2.664000005 |
| Q1 | 8.419999905 |
| median | 18.5 |
| Q3 | 44.92000008 |
| 95-th percentile | 174.7020004 |
| Maximum | 1863.97998 |
| Range | 1863.94478 |
| Interquartile range (IQR) | 36.50000017 |
Descriptive statistics
| Standard deviation | 126.9018454 |
|---|---|
| Coefficient of variation (CV) | 2.593066393 |
| Kurtosis | 130.0100696 |
| Mean | 48.938911 |
| Median Absolute Deviation (MAD) | 13.11999989 |
| Skewness | 10.2346566 |
| Sum | 29510.16333 |
| Variance | 16104.07837 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 7.690000057 | 3 | 0.5% | |
| 19.05999947 | 3 | 0.5% | |
| 8.859999657 | 2 | 0.3% | |
| 32.22 | 2 | 0.3% | |
| 2.130000114 | 2 | 0.3% | |
| 7.75 | 2 | 0.3% | |
| 2.420000076 | 2 | 0.3% | |
| 12.19999981 | 2 | 0.3% | |
| 13.72000027 | 2 | 0.3% | |
| 3.269999981 | 2 | 0.3% | |
| Other values (577) | 581 | 96.4% |
| Value | Count | Frequency (%) | |
| 0.0352 | 1 | 0.2% | |
| 0.4036999941 | 1 | 0.2% | |
| 0.4339999855 | 1 | 0.2% | |
| 0.7200000286 | 1 | 0.2% | |
| 0.9010000229 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 1863.97998 | 1 | 0.2% | |
| 1732.699951 | 1 | 0.2% | |
| 1162.315 | 1 | 0.2% | |
| 483.92 | 1 | 0.2% | |
| 478 | 1 | 0.2% |
| Distinct | 579 |
|---|---|
| Distinct (%) | 96.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 50.40290272 |
|---|---|
| Minimum | 0.047 |
| Maximum | 1911.939941 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.047 |
|---|---|
| 5-th percentile | 2.80900001 |
| Q1 | 8.629999943 |
| median | 19.02 |
| Q3 | 46.54999924 |
| 95-th percentile | 185.3459946 |
| Maximum | 1911.939941 |
| Range | 1911.892941 |
| Interquartile range (IQR) | 37.91999929 |
Descriptive statistics
| Standard deviation | 130.0359377 |
|---|---|
| Coefficient of variation (CV) | 2.579929542 |
| Kurtosis | 129.4920539 |
| Mean | 50.40290272 |
| Median Absolute Deviation (MAD) | 13.40999987 |
| Skewness | 10.2077792 |
| Sum | 30392.95034 |
| Variance | 16909.3451 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 11.63000011 | 3 | 0.5% | |
| 8.5 | 2 | 0.3% | |
| 18.79999924 | 2 | 0.3% | |
| 3.680000067 | 2 | 0.3% | |
| 4.8 | 2 | 0.3% | |
| 12.35000038 | 2 | 0.3% | |
| 14.88000011 | 2 | 0.3% | |
| 4.159999847 | 2 | 0.3% | |
| 25.29999924 | 2 | 0.3% | |
| 43.25999832 | 2 | 0.3% | |
| Other values (569) | 582 | 96.5% |
| Value | Count | Frequency (%) | |
| 0.047 | 1 | 0.2% | |
| 0.4487000108 | 1 | 0.2% | |
| 0.4494999945 | 1 | 0.2% | |
| 0.7200000286 | 1 | 0.2% | |
| 0.9501000047 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 1911.939941 | 1 | 0.2% | |
| 1768.599976 | 1 | 0.2% | |
| 1193.97 | 1 | 0.2% | |
| 493.2000122 | 1 | 0.2% | |
| 485.54 | 1 | 0.2% |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 3986418.766 |
|---|---|
| Minimum | 0 |
| Maximum | 91849464 |
| Zeros | 1 |
| Zeros (%) | 0.2% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0 |
|---|---|
| 5-th percentile | 73056.6 |
| Q1 | 371544.5 |
| median | 1036839 |
| Q3 | 3172661.5 |
| 95-th percentile | 18852959.2 |
| Maximum | 91849464 |
| Range | 91849464 |
| Interquartile range (IQR) | 2801117 |
Descriptive statistics
| Standard deviation | 9184854.731 |
|---|---|
| Coefficient of variation (CV) | 2.304036598 |
| Kurtosis | 30.04925106 |
| Mean | 3986418.766 |
| Median Absolute Deviation (MAD) | 878232 |
| Skewness | 4.918668027 |
| Sum | 2403810516 |
| Variance | 8.436155644e+13 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 284671 | 1 | 0.2% | |
| 545126 | 1 | 0.2% | |
| 744559 | 1 | 0.2% | |
| 16004 | 1 | 0.2% | |
| 4310889 | 1 | 0.2% | |
| 8966943 | 1 | 0.2% | |
| 18234920 | 1 | 0.2% | |
| 424792 | 1 | 0.2% | |
| 1331898 | 1 | 0.2% | |
| 3454323 | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
| Value | Count | Frequency (%) | |
| 0 | 1 | 0.2% | |
| 8222 | 1 | 0.2% | |
| 10940 | 1 | 0.2% | |
| 11260 | 1 | 0.2% | |
| 16004 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 91849464 | 1 | 0.2% | |
| 72771504 | 1 | 0.2% | |
| 63253352 | 1 | 0.2% | |
| 59710166 | 1 | 0.2% | |
| 59694611 | 1 | 0.2% |
| Distinct | 579 |
|---|---|
| Distinct (%) | 96.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 50.61676967 |
|---|---|
| Minimum | 0.049 |
| Maximum | 1919.449951 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.049 |
|---|---|
| 5-th percentile | 2.851999989 |
| Q1 | 8.729999886 |
| median | 19.15 |
| Q3 | 46.35499969 |
| 95-th percentile | 183.904 |
| Maximum | 1919.449951 |
| Range | 1919.400951 |
| Interquartile range (IQR) | 37.62499981 |
Descriptive statistics
| Standard deviation | 132.1205679 |
|---|---|
| Coefficient of variation (CV) | 2.61021335 |
| Kurtosis | 130.7119578 |
| Mean | 50.61676967 |
| Median Absolute Deviation (MAD) | 13.47000017 |
| Skewness | 10.31485658 |
| Sum | 30521.91211 |
| Variance | 17455.84446 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 35 | 3 | 0.5% | |
| 4.139999866 | 2 | 0.3% | |
| 19.17000008 | 2 | 0.3% | |
| 11.89999962 | 2 | 0.3% | |
| 20 | 2 | 0.3% | |
| 4.800000191 | 2 | 0.3% | |
| 15.52000046 | 2 | 0.3% | |
| 10.44999981 | 2 | 0.3% | |
| 10.34000015 | 2 | 0.3% | |
| 3.660000086 | 2 | 0.3% | |
| Other values (569) | 582 | 96.5% |
| Value | Count | Frequency (%) | |
| 0.049 | 1 | 0.2% | |
| 0.4620000124 | 1 | 0.2% | |
| 0.4799999893 | 1 | 0.2% | |
| 0.730799973 | 1 | 0.2% | |
| 0.9300000072 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 1919.449951 | 1 | 0.2% | |
| 1818.27002 | 1 | 0.2% | |
| 1267 | 1 | 0.2% | |
| 491.6199951 | 1 | 0.2% | |
| 479 | 1 | 0.2% |
| Distinct | 585 |
|---|---|
| Distinct (%) | 97.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 51.61048899 |
|---|---|
| Minimum | 0.0498 |
| Maximum | 1919.449951 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.0498 |
|---|---|
| 5-th percentile | 2.955000043 |
| Q1 | 9.07 |
| median | 19.56999969 |
| Q3 | 47.82999992 |
| 95-th percentile | 184.9900005 |
| Maximum | 1919.449951 |
| Range | 1919.400151 |
| Interquartile range (IQR) | 38.75999992 |
Descriptive statistics
| Standard deviation | 133.2828515 |
|---|---|
| Coefficient of variation (CV) | 2.582476045 |
| Kurtosis | 129.4868812 |
| Mean | 51.61048899 |
| Median Absolute Deviation (MAD) | 13.68999969 |
| Skewness | 10.25138653 |
| Sum | 31121.12486 |
| Variance | 17764.31849 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 8.399999619 | 2 | 0.3% | |
| 42.75 | 2 | 0.3% | |
| 36.65000153 | 2 | 0.3% | |
| 18.79999924 | 2 | 0.3% | |
| 4.71999979 | 2 | 0.3% | |
| 10.35000038 | 2 | 0.3% | |
| 4.989999771 | 2 | 0.3% | |
| 5.5 | 2 | 0.3% | |
| 11.60000038 | 2 | 0.3% | |
| 25 | 2 | 0.3% | |
| Other values (575) | 583 | 96.7% |
| Value | Count | Frequency (%) | |
| 0.0498 | 1 | 0.2% | |
| 0.4799999893 | 1 | 0.2% | |
| 0.4979999959 | 1 | 0.2% | |
| 0.7543990016 | 1 | 0.2% | |
| 0.9599999785 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 1919.449951 | 1 | 0.2% | |
| 1847.420044 | 1 | 0.2% | |
| 1270 | 1 | 0.2% | |
| 495 | 1 | 0.2% | |
| 491.7999878 | 1 | 0.2% |
| Distinct | 585 |
|---|---|
| Distinct (%) | 97.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 48.98457152 |
|---|---|
| Minimum | 0.0302 |
| Maximum | 1898 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.0302 |
|---|---|
| 5-th percentile | 2.814090061 |
| Q1 | 8.409999847 |
| median | 18.48999977 |
| Q3 | 44.68000031 |
| 95-th percentile | 175.6449995 |
| Maximum | 1898 |
| Range | 1897.9698 |
| Interquartile range (IQR) | 36.27000046 |
Descriptive statistics
| Standard deviation | 127.8241072 |
|---|---|
| Coefficient of variation (CV) | 2.609476887 |
| Kurtosis | 137.6574393 |
| Mean | 48.98457152 |
| Median Absolute Deviation (MAD) | 13.11000061 |
| Skewness | 10.53669132 |
| Sum | 29537.69663 |
| Variance | 16339.00239 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 3.339999914 | 3 | 0.5% | |
| 10.61999989 | 2 | 0.3% | |
| 11.63000011 | 2 | 0.3% | |
| 4.949999809 | 2 | 0.3% | |
| 0.9200000167 | 2 | 0.3% | |
| 8.409999847 | 2 | 0.3% | |
| 8.119999886 | 2 | 0.3% | |
| 36 | 2 | 0.3% | |
| 8 | 2 | 0.3% | |
| 17.39999962 | 2 | 0.3% | |
| Other values (575) | 582 | 96.5% |
| Value | Count | Frequency (%) | |
| 0.0302 | 1 | 0.2% | |
| 0.4499999881 | 1 | 0.2% | |
| 0.4600000083 | 1 | 0.2% | |
| 0.7099999785 | 1 | 0.2% | |
| 0.9200000167 | 2 | 0.3% |
| Value | Count | Frequency (%) | |
| 1898 | 1 | 0.2% | |
| 1800.01001 | 1 | 0.2% | |
| 1090 | 1 | 0.2% | |
| 475.15 | 1 | 0.2% | |
| 456.7799988 | 1 | 0.2% |
| Distinct | 586 |
|---|---|
| Distinct (%) | 97.2% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 50.01382864 |
|---|---|
| Minimum | 0.0325 |
| Maximum | 1909.839966 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 0.0325 |
|---|---|
| 5-th percentile | 2.900000095 |
| Q1 | 8.730000019 |
| median | 18.98999977 |
| Q3 | 45.88000107 |
| 95-th percentile | 176.5400038 |
| Maximum | 1909.839966 |
| Range | 1909.807466 |
| Interquartile range (IQR) | 37.15000105 |
Descriptive statistics
| Standard deviation | 129.1972238 |
|---|---|
| Coefficient of variation (CV) | 2.583230025 |
| Kurtosis | 134.9676923 |
| Mean | 50.01382864 |
| Median Absolute Deviation (MAD) | 13.38000023 |
| Skewness | 10.42402757 |
| Sum | 30158.33867 |
| Variance | 16691.92263 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 11.27999973 | 3 | 0.5% | |
| 2.900000095 | 2 | 0.3% | |
| 81.62000275 | 2 | 0.3% | |
| 38.08000183 | 2 | 0.3% | |
| 3.359999895 | 2 | 0.3% | |
| 20.40999985 | 2 | 0.3% | |
| 24.26000023 | 2 | 0.3% | |
| 18.76000023 | 2 | 0.3% | |
| 5.5 | 2 | 0.3% | |
| 7.440000057 | 2 | 0.3% | |
| Other values (576) | 582 | 96.5% |
| Value | Count | Frequency (%) | |
| 0.0325 | 1 | 0.2% | |
| 0.4600000083 | 1 | 0.2% | |
| 0.4860000014 | 1 | 0.2% | |
| 0.7202000022 | 1 | 0.2% | |
| 0.9599999785 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 1909.839966 | 1 | 0.2% | |
| 1805.099976 | 1 | 0.2% | |
| 1124.31 | 1 | 0.2% | |
| 485.64 | 1 | 0.2% | |
| 465.730011 | 1 | 0.2% |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 2957977.947 |
|---|---|
| Minimum | 10362 |
| Maximum | 128871249 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | 10362 |
|---|---|
| 5-th percentile | 71443.4 |
| Q1 | 317829.5 |
| median | 883037 |
| Q3 | 2248438 |
| 95-th percentile | 12456273.9 |
| Maximum | 128871249 |
| Range | 128860887 |
| Interquartile range (IQR) | 1930608.5 |
Descriptive statistics
| Standard deviation | 7822016.112 |
|---|---|
| Coefficient of variation (CV) | 2.644379455 |
| Kurtosis | 118.8327511 |
| Mean | 2957977.947 |
| Median Absolute Deviation (MAD) | 703301 |
| Skewness | 8.903374896 |
| Sum | 1783660702 |
| Variance | 6.118393606e+13 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 269631 | 1 | 0.2% | |
| 325794 | 1 | 0.2% | |
| 1034562 | 1 | 0.2% | |
| 714049 | 1 | 0.2% | |
| 1276984 | 1 | 0.2% | |
| 8473944 | 1 | 0.2% | |
| 607546 | 1 | 0.2% | |
| 11801500 | 1 | 0.2% | |
| 806200 | 1 | 0.2% | |
| 2015850 | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
| Value | Count | Frequency (%) | |
| 10362 | 1 | 0.2% | |
| 17549 | 1 | 0.2% | |
| 21810 | 1 | 0.2% | |
| 26697 | 1 | 0.2% | |
| 27765 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 128871249 | 1 | 0.2% | |
| 50224860 | 1 | 0.2% | |
| 50107372 | 1 | 0.2% | |
| 43213840 | 1 | 0.2% | |
| 40206888 | 1 | 0.2% |
industry
Categorical
| Distinct | 44 |
|---|---|
| Distinct (%) | 7.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Technology | |
|---|---|
| Real Estate | |
| Biotechnology | |
| Energy | |
| Retail | |
| Other values (39) |
| Value | Count | Frequency (%) | |
| Technology | 76 | 12.6% | |
| Real Estate | 64 | 10.6% | |
| Biotechnology | 58 | 9.6% | |
| Energy | 46 | 7.6% | |
| Retail | 36 | 6.0% | |
| Health Care | 36 | 6.0% | |
| Pharmaceuticals | 32 | 5.3% | |
| Media | 32 | 5.3% | |
| Financial Services | 24 | 4.0% | |
| Utilities | 19 | 3.2% | |
| Other values (34) | 180 | 29.9% |
Frequencies of value counts
Unique
| Unique | 5 ? |
|---|---|
| Unique (%) | 0.8% |
Histogram of lengths of the category
Length
| Max length | 32 |
|---|---|
| Median length | 11 |
| Mean length | 12.45273632 |
| Min length | 0 |
| Distinct | 1 |
|---|---|
| Distinct (%) | 0.2% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| Minimum | 2020-06-30 00:00:00 |
|---|---|
| Maximum | 2020-06-30 00:00:00 |
Histogram with fixed size bins (bins=1)
| Distinct | 1 |
|---|---|
| Distinct (%) | 0.2% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| 2020-06-30 |
|---|
| Value | Count | Frequency (%) | |
| 2020-06-30 | 603 | 100.0% |
Frequencies of value counts
Unique
| Unique | 0 ? |
|---|---|
| Unique (%) | 0.0% |
Histogram of lengths of the category
Length
| Max length | 10 |
|---|---|
| Median length | 10 |
| Mean length | 10 |
| Min length | 10 |
| Distinct | 280 |
|---|---|
| Distinct (%) | 46.4% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 0.2094096186 |
|---|---|
| Minimum | -13.02 |
| Maximum | 44.19 |
| Zeros | 3 |
| Zeros (%) | 0.5% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | -13.02 |
|---|---|
| 5-th percentile | -1.56 |
| Q1 | -0.325 |
| median | 0.07 |
| Q3 | 0.48 |
| 95-th percentile | 1.919 |
| Maximum | 44.19 |
| Range | 57.21 |
| Interquartile range (IQR) | 0.805 |
Descriptive statistics
| Standard deviation | 2.459259145 |
|---|---|
| Coefficient of variation (CV) | 11.74377357 |
| Kurtosis | 176.5202683 |
| Mean | 0.2094096186 |
| Median Absolute Deviation (MAD) | 0.4 |
| Skewness | 9.885464036 |
| Sum | 126.274 |
| Variance | 6.047955541 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 0.02 | 9 | 1.5% | |
| 0.05 | 8 | 1.3% | |
| 0.11 | 8 | 1.3% | |
| 0.15 | 7 | 1.2% | |
| 0.22 | 7 | 1.2% | |
| 0.06 | 7 | 1.2% | |
| 0.2 | 6 | 1.0% | |
| 0.12 | 6 | 1.0% | |
| 0.01 | 6 | 1.0% | |
| -0.24 | 6 | 1.0% | |
| Other values (270) | 533 | 88.4% |
| Value | Count | Frequency (%) | |
| -13.02 | 1 | 0.2% | |
| -10.81 | 1 | 0.2% | |
| -10.64 | 1 | 0.2% | |
| -6.13 | 1 | 0.2% | |
| -4.65 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 44.19 | 1 | 0.2% | |
| 14.82 | 1 | 0.2% | |
| 14.73 | 1 | 0.2% | |
| 10.63 | 1 | 0.2% | |
| 7.36 | 1 | 0.2% |
| Distinct | 571 |
|---|---|
| Distinct (%) | 94.7% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 0.1409545177 |
|---|---|
| Minimum | -11.7318258 |
| Maximum | 24.2301 |
| Zeros | 3 |
| Zeros (%) | 0.5% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | -11.7318258 |
|---|---|
| 5-th percentile | -1.2241938 |
| Q1 | -0.2958 |
| median | 0.0186966 |
| Q3 | 0.36901055 |
| 95-th percentile | 1.6202769 |
| Maximum | 24.2301 |
| Range | 35.9619258 |
| Interquartile range (IQR) | 0.66481055 |
Descriptive statistics
| Standard deviation | 1.651367617 |
|---|---|
| Coefficient of variation (CV) | 11.71560616 |
| Kurtosis | 90.87269426 |
| Mean | 0.1409545177 |
| Median Absolute Deviation (MAD) | 0.3226668 |
| Skewness | 6.312116366 |
| Sum | 84.9955742 |
| Variance | 2.727015005 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 0 | 3 | 0.5% | |
| 0.153 | 3 | 0.5% | |
| -0.2754 | 3 | 0.5% | |
| 0.051 | 3 | 0.5% | |
| 0.1938 | 3 | 0.5% | |
| -0.51 | 3 | 0.5% | |
| 0.0918 | 2 | 0.3% | |
| 0.4284 | 2 | 0.3% | |
| -0.0357 | 2 | 0.3% | |
| -0.0102 | 2 | 0.3% | |
| Other values (561) | 577 | 95.7% |
| Value | Count | Frequency (%) | |
| -11.7318258 | 1 | 0.2% | |
| -4.8690383 | 1 | 0.2% | |
| -3.5922367 | 1 | 0.2% | |
| -3.5005271 | 1 | 0.2% | |
| -3.3966 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 24.2301 | 1 | 0.2% | |
| 14.0549778 | 1 | 0.2% | |
| 9.787563 | 1 | 0.2% | |
| 9.0623226 | 1 | 0.2% | |
| 7.2840036 | 1 | 0.2% |
| Distinct | 1 |
|---|---|
| Distinct (%) | 0.2% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| 2020-06-30 |
|---|
| Value | Count | Frequency (%) | |
| 2020-06-30 | 603 | 100.0% |
Frequencies of value counts
Unique
| Unique | 0 ? |
|---|---|
| Unique (%) | 0.0% |
Histogram of lengths of the category
Length
| Max length | 10 |
|---|---|
| Median length | 10 |
| Mean length | 10 |
| Min length | 10 |
| Distinct | 603 |
|---|---|
| Distinct (%) | 100.0% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| MITO | 1 |
|---|---|
| SBLK | 1 |
| CVGI | 1 |
| LVGO | 1 |
| UFS | 1 |
| Other values (598) |
| Value | Count | Frequency (%) | |
| MITO | 1 | 0.2% | |
| SBLK | 1 | 0.2% | |
| CVGI | 1 | 0.2% | |
| LVGO | 1 | 0.2% | |
| UFS | 1 | 0.2% | |
| LIZI | 1 | 0.2% | |
| MG | 1 | 0.2% | |
| RTLR | 1 | 0.2% | |
| EVOP | 1 | 0.2% | |
| AFYA | 1 | 0.2% | |
| Other values (593) | 593 | 98.3% |
Frequencies of value counts
Unique
| Unique | 603 ? |
|---|---|
| Unique (%) | 100.0% |
Histogram of lengths of the category
Length
| Max length | 5 |
|---|---|
| Median length | 4 |
| Mean length | 3.60199005 |
| Min length | 2 |
eps_diff
Real number (ℝ)
| Distinct | 602 |
|---|---|
| Distinct (%) | 99.8% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | 0.06845510083 |
|---|---|
| Minimum | -10.8925 |
| Maximum | 19.9599 |
| Zeros | 0 |
| Zeros (%) | 0.0% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | -10.8925 |
|---|---|
| 5-th percentile | -0.5040762 |
| Q1 | -0.0424483 |
| median | 0.04085 |
| Q3 | 0.16192775 |
| 95-th percentile | 0.76354491 |
| Maximum | 19.9599 |
| Range | 30.8524 |
| Interquartile range (IQR) | 0.20437605 |
Descriptive statistics
| Standard deviation | 1.175326324 |
|---|---|
| Coefficient of variation (CV) | 17.16930236 |
| Kurtosis | 157.7037009 |
| Mean | 0.06845510083 |
| Median Absolute Deviation (MAD) | 0.105409 |
| Skewness | 5.971971313 |
| Sum | 41.2784258 |
| Variance | 1.381391969 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| -0.0175 | 2 | 0.3% | |
| 0.03485 | 1 | 0.2% | |
| -0.0918334 | 1 | 0.2% | |
| 0.1149915 | 1 | 0.2% | |
| -0.1338 | 1 | 0.2% | |
| 0.0382 | 1 | 0.2% | |
| -4.65 | 1 | 0.2% | |
| 0.1091525 | 1 | 0.2% | |
| 0.3911 | 1 | 0.2% | |
| -1.3321276 | 1 | 0.2% | |
| Other values (592) | 592 | 98.2% |
| Value | Count | Frequency (%) | |
| -10.8925 | 1 | 0.2% | |
| -9.6234 | 1 | 0.2% | |
| -4.65 | 1 | 0.2% | |
| -4.5016051 | 1 | 0.2% | |
| -1.9229434 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 19.9599 | 1 | 0.2% | |
| 5.8496 | 1 | 0.2% | |
| 4.942437 | 1 | 0.2% | |
| 3.005375 | 1 | 0.2% | |
| 2.6544 | 1 | 0.2% |
beat_or_miss
Categorical
| Distinct | 2 |
|---|---|
| Distinct (%) | 0.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| beat | |
|---|---|
| miss |
| Value | Count | Frequency (%) | |
| beat | 402 | 66.7% | |
| miss | 201 | 33.3% |
Frequencies of value counts
Unique
| Unique | 0 ? |
|---|---|
| Unique (%) | 0.0% |
Histogram of lengths of the category
Length
| Max length | 4 |
|---|---|
| Median length | 4 |
| Mean length | 4 |
| Min length | 4 |
price_diff
Real number (ℝ)
| Distinct | 577 |
|---|---|
| Distinct (%) | 95.7% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Infinite | 0 |
| Infinite (%) | 0.0% |
| Mean | -0.4123469206 |
|---|---|
| Minimum | -93.69 |
| Maximum | 45.85998535 |
| Zeros | 4 |
| Zeros (%) | 0.7% |
| Memory size | 4.7 KiB |
Quantile statistics
| Minimum | -93.69 |
|---|---|
| 5-th percentile | -5.80200119 |
| Q1 | -0.8600003052 |
| median | 0 |
| Q3 | 0.6800001526 |
| 95-th percentile | 3.93699913 |
| Maximum | 45.85998535 |
| Range | 139.5499854 |
| Interquartile range (IQR) | 1.540000458 |
Descriptive statistics
| Standard deviation | 6.470970379 |
|---|---|
| Coefficient of variation (CV) | -15.69302462 |
| Kurtosis | 86.21579514 |
| Mean | -0.4123469206 |
| Median Absolute Deviation (MAD) | 0.7600002289 |
| Skewness | -4.895227518 |
| Sum | -248.6451931 |
| Variance | 41.87345764 |
| Monotocity | Not monotonic |
Histogram with fixed size bins (bins=50)
| Value | Count | Frequency (%) | |
| 0 | 4 | 0.7% | |
| 0.25 | 3 | 0.5% | |
| 0.03999996185 | 3 | 0.5% | |
| 0.68 | 3 | 0.5% | |
| 0.3400001526 | 2 | 0.3% | |
| 0.1599998474 | 2 | 0.3% | |
| -2.090000153 | 2 | 0.3% | |
| -0.1199998856 | 2 | 0.3% | |
| 0.5599994659 | 2 | 0.3% | |
| 0.09 | 2 | 0.3% | |
| Other values (567) | 578 | 95.9% |
| Value | Count | Frequency (%) | |
| -93.69 | 1 | 0.2% | |
| -45.08 | 1 | 0.2% | |
| -33.07 | 1 | 0.2% | |
| -30.28997803 | 1 | 0.2% | |
| -27.08 | 1 | 0.2% |
| Value | Count | Frequency (%) | |
| 45.85998535 | 1 | 0.2% | |
| 45.69995117 | 1 | 0.2% | |
| 24.70001221 | 1 | 0.2% | |
| 24.16000366 | 1 | 0.2% | |
| 12.18000793 | 1 | 0.2% |
price_diff_c
Categorical
| Distinct | 2 |
|---|---|
| Distinct (%) | 0.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| decrease | |
|---|---|
| increase |
| Value | Count | Frequency (%) | |
| decrease | 304 | 50.4% | |
| increase | 299 | 49.6% |
Frequencies of value counts
Unique
| Unique | 0 ? |
|---|---|
| Unique (%) | 0.0% |
Histogram of lengths of the category
Length
| Max length | 8 |
|---|---|
| Median length | 8 |
| Mean length | 8 |
| Min length | 8 |
still_up
Boolean
| Distinct | 2 |
|---|---|
| Distinct (%) | 0.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| 0 | |
|---|---|
| 1 |
| Value | Count | Frequency (%) | |
| 0 | 496 | 82.3% | |
| 1 | 107 | 17.7% |
agg_sentiment
Categorical
| Distinct | 2 |
|---|---|
| Distinct (%) | 0.3% |
| Missing | 0 |
| Missing (%) | 0.0% |
| Memory size | 4.7 KiB |
| positive | |
|---|---|
| negative |
| Value | Count | Frequency (%) | |
| positive | 530 | 87.9% | |
| negative | 73 | 12.1% |
Frequencies of value counts
Unique
| Unique | 0 ? |
|---|---|
| Unique (%) | 0.0% |
Histogram of lengths of the category
Length
| Max length | 8 |
|---|---|
| Median length | 8 |
| Mean length | 8 |
| Min length | 8 |
Pearson's r
The Pearson's correlation coefficient (r) is a measure of linear correlation between two variables. It's value lies between -1 and +1, -1 indicating total negative linear correlation, 0 indicating no linear correlation and 1 indicating total positive linear correlation. Furthermore, r is invariant under separate changes in location and scale of the two variables, implying that for a linear function the angle to the x-axis does not affect r.To calculate r for two variables X and Y, one divides the covariance of X and Y by the product of their standard deviations.
Spearman's ρ
The Spearman's rank correlation coefficient (ρ) is a measure of monotonic correlation between two variables, and is therefore better in catching nonlinear monotonic correlations than Pearson's r. It's value lies between -1 and +1, -1 indicating total negative monotonic correlation, 0 indicating no monotonic correlation and 1 indicating total positive monotonic correlation.To calculate ρ for two variables X and Y, one divides the covariance of the rank variables of X and Y by the product of their standard deviations.
Kendall's τ
Similarly to Spearman's rank correlation coefficient, the Kendall rank correlation coefficient (τ) measures ordinal association between two variables. It's value lies between -1 and +1, -1 indicating total negative correlation, 0 indicating no correlation and 1 indicating total positive correlation.To calculate τ for two variables X and Y, one determines the number of concordant and discordant pairs of observations. τ is given by the number of concordant pairs minus the discordant pairs divided by the total number of pairs.
Phik (φk)
Phik (φk) is a new and practical correlation coefficient that works consistently between categorical, ordinal and interval variables, captures non-linear dependency and reverts to the Pearson correlation coefficient in case of a bivariate normal input distribution. There is extensive documentation available here.Cramér's V (φc)
Cramér's V is an association measure for nominal random variables. The coefficient ranges from 0 to 1, with 0 indicating independence and 1 indicating perfect association. The empirical estimators used for Cramér's V have been proved to be biased, even for large samples. We use a bias-corrected measure that has been proposed by Bergsma in 2013 that can be found here.First rows
| ticker | link | transcript | article | header | prepared_remarks | name | ticker_and_exchange | date | time | hour | ampm | day | adjusted_date | prev_date | next_date_x | stock_exchange | remarks_tokenized | sentence | logit | prediction | sentiment_score | next_date_y | o1 | h1 | l1 | c1 | v1 | o2 | h2 | l2 | c2 | v2 | industry | earnings_for | earnings_for_string | actual | estimate | period | symbol | eps_diff | beat_or_miss | price_diff | price_diff_c | still_up | agg_sentiment | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 0 | AAOI | /earnings/call-transcripts/2020/08/07/applied-optoelectronics-inc-aaoi-q2-2020-earnings.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Applied Optoelectronics Inc</strong> <span class="ticker" data-id="288898">(<a href="https://www.fool.com/quote/nasdaq/applied-optoelectronics-inc/aaoi/">NASDAQ:AAOI</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">10:30 p.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Good day, and welcome to the Applied Optoelectronics' Second Quarter 2020 Earnings Conference Call. [Operator Instructions]</p><p>I would now like to turn the conference over to Monica Gould, Investor Relations for Applied Optoelectronics. Please go ahead, ma'am.</p><p><strong>Monica Gould</strong> -- <em>Investor Relations</em></p><p>Thank you. I'm Monica Gould, Investor Relations for Applied Optoelectronics, and I'm pleased to welcome you to AOI's Second Quarter 2020 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its second quarter 2020 financial results and provided its outlook for the third quarter of 2020. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website that will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 2020.</p><p>A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results to differ materially from those anticipated in such forward-looking statements. In some cases, you can identify forward-looking statements by terminologies such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will or thinks. And by other similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the third quarter of 2020.</p><p>Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the risk factors section of the company's reports on file with the SEC, including the company's annual report on Form 10-K for the year ended December 31, 2019, and the company's quarterly report on Form 10-Q for the period ended March 31, 2020. Also, with the exception of revenue, all financials discussed today are on a non-GAAP basis, unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.</p><p>Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Jefferies 2020 Semiconductor, IT, Hardware and Communications Infrastructure Summit on September 2, and at the H.C. Wainwright 22nd Annual Global Investment Conference on September 15. These discussions will be webcast live, and a link to the webcast will be available on the Investor Relations section of the AOI website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note that the date of our third quarter 2020 earnings call is currently scheduled for November 5, 2020.</p><p>Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?</p><p><strong>Dr. Thompson Lin</strong> -- <em>Founder, President, Chief Executive Officer, and Chairman of the Board</em></p><p>Thank you, Monica, and thank you, everyone, for joining us today. First, I would like to once again thank our entire AOI team that has continued to support one another and our customers during the COVID-19 pandemic. Our condolences go out to all those around the world who have been impacted by the virus, and we send our thanks to the first responders and essential workers who continue to protect and support our communities. Turning to the quarter, AOI delivered Q2 revenue of $65.2 million, which was above our guidance of $55 million to $60 million. Q2 revenue grew 50% compared to the second quarter last year at 61% sequentially, marking the fourth quarter of year-over-year growth that AOI has recorded since the third quarter of 2017. Our performance was driven by improved demand from our new customers, increase customer diversifications and record revenue in our telecom segment led by 5G deployments in China. Non-GAAP gross margin of 23.1% was on the lower end of our expected guidance range due to product mix as well as some COVID-19-related expenses that continued into the quarter, while non-GAAP net loss of $0.24 per share was in line with our expectations.</p><p>We expect that continued improvement through our cost reduction efforts and more favorable product mix will lead to improving gross margin over the next several quarters. And we anticipate revenue to be up more than 20% sequentially at the midpoint of r guidance range. We are encouraged by the increased datacenter demand from a diverse set of customers and improving 5G-related activity that began earlier this year and will continue into Q3. During the quarter, we have had design wins, including four with telecom customers which are related to 5G network deployments, mainly in China. The other four design wins were with existing customers in our datacenter segment. Additionally, we are pleased to report that we saw increased demand for our 100G products in Q2. Total revenue for 100G products increased almost 350% from the same period last year, marking the second quarter in a row of year-over-year growth in 100G sales.</p><p>During the second quarter, we saw significant improvement in our telecom and cable sectors. Revenue in our telecom segment more than doubled sequentially and outpaced our CATV business. Driven by increased 5G activity, our cable segment improved sequentially as we began to see increased order flow for product-related to CATV upgrades in North America. We are pleased to be project we received our fourth significant orders for CATV products related to MSO upgrades in Q2, which will begin to ship in Q3. As we stated in our previous earnings calls, we have taken various actions to ensure the safety and well-being of our employees who all continue to support our customer needs and the needs of the communities in which we operate. Our offices and factories around the world are back to normal operation due to our strict adherence to health and safety recommendations. Looking ahead, we'll continue to digitally enforce these health precautions to protect the welfare of our employees and our communities.</p><p>With that, I will turn the call over to Stefan to review the details of our Q2 performance and outlook for Q3. Stefan?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Thank you, Thompson. As you may recall, we had disruptions in operations in our China factory during Q1. However, as Thompson mentioned, due to the hard work and dedication of our employees and supply chain partners, we are back to normal operations and have increased capacity in both our wafer fab in Sugar Land as well as our factories in China and Taiwan compared to our capacity pre-COVID. We continue to see high demand from our datacenter customers who remain focused on improving network performance in light of the increased traffic related to the shift toward working from home. We also received our first orders from CATV customers that we believe are related to network upgrades by MSOs also responding to stresses on their networks. Looking ahead to Q3. We are expecting over 20% sequential growth at the midpoint of our guidance range and a continued improvement in our gross margin. Turning to our quarterly performance.</p><p>Total revenue for the second quarter was $65.2 million, which was above our guidance range. Our datacenter revenue rose 58% sequentially and 65% year-over-year to $52.6 million and accounted for 81% of our total revenue. This was our highest datacenter revenue quarter in two years. In the second quarter, 33% of our datacenter revenue was from our 40G transceiver products, and 64% was from our 100G products. As Thompson noted, this marks the second quarter in a row of year-over-year growth in our 100G transceivers. Importantly, we continued to see increased data center demand during Q2 from a diverse set of customers. Overall, for the quarter, our top 10 customers represented 86.9% of revenue which is down from 90.9% in Q2 of last year. We had three 10% or greater customers in the quarter, all of which were in the datacenter segment. These customers contributed 35% and 15% and 12% of total revenue, respectively. One of these data center customers was a new 10% customer for AOI, where we have been gaining share.</p><p>This new customer is a U.S.-based hyperscale cloud operator that has primarily been purchasing our 100G transceivers. We also have seen increasing revenue from a large U.S.-based switch router vendor who approached the 10% revenue mark this quarter. Rounding out our top five customers was a data center customer in China. Looking at our customer base as a whole, in addition to the 10% or greater customers, we had three other customers who each contributed between 5% and 10% of total revenue. To put this in some context, in Q2 of last year, we had only two 10% or greater customers and one customer between 5% and 10%. Now we have six customers each over 5%, and we are pleased to see that our efforts in diversifying our customer base continue to show tangible results and that many of these new customers are contributing meaningfully to our results. In addition to the market diversity, our top 10 customers are also geographically diverse. Out of our 5% or greater customers in Q2, all but one were U.S.-based multinationals, and the remaining one was a China-based switch router vendor primarily serving the data center market.</p><p>Looking at our top 10 customers in Q2, seven were U.S.-based multinational corporations, two were based in China and one in Europe. Turning to our cable television product segment. We were able to resume manufacturing at a normal capacity during the quarter and recorded a sequential revenue increase of 45% to $6.1 million or 9% of total revenue. However, CATV revenue remains below the $9.8 million we recorded in Q2 of last year. The sequential increase was driven by an increased order flow in North America for cable TV upgrades. As I noted earlier, we saw our first significant orders for CATV upgrades driven by the shift to working from home this quarter, which we will recognize as revenue in Q3. For the remainder of the year, we expect to ramp up production to meet order demand. Revenue from our telecom products rose to a record $6.2 million and accounted for 10% of total revenue, reflecting an increase of 141% from the first quarter and 279% from Q2 of last year.</p><p>These results continue to be driven by increased 5G demand in China. Based on current order trends, we expect to see continued strong sequential growth in CATV and telecom revenue in Q3. In Q2, we generated non-GAAP gross margin of 23.1% compared to 27.2% in Q2 of the prior year. Gross margin was at the low end of our guidance range of 23% to 25% due to unfavorable product mix, mostly in our data center segment, along with increased costs, including manufacturing and shipping costs related to COVID. We expect gross margins to recover to pre-COVID levels as we implement cost reductions that were delayed by the pandemic. We also expect to see improvements in our product mix that we anticipate will improve our gross margin. Total non-GAAP operating expenses in the second quarter were $20.6 million or 31.6% of revenue compared with $19.5 million or 44.9% of revenue in the same quarter last year. Operating expenses increased from last year due mainly to increased shipping costs, sales commissions and insurance costs.</p><p>Non-GAAP operating loss in the second quarter was $5.6 million compared to an operating loss of $7.7 million in Q2 of last year. GAAP net loss for Q2 was $18.6 million or a loss of $0.89 per basic share compared with a GAAP net loss of $11.4 million or $0.57 per basic share in Q2 of last year. On a non-GAAP basis, net loss for Q2 was $5 million or a loss of $0.24 per basic share, which was in line with our guidance range of a loss of $4.10 to $5.7 million or a loss of $0.20 to $0.28 per basic share, and compares to a net loss of $5.2 million or a loss of $0.26 per basic share in Q2 of last year. The basic shares outstanding used for computing the net loss in Q2 were $20.9 million. Turning now to the balance sheet. We ended the second quarter with $58.9 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $62.5 million at the end of the first quarter and reflects $15.5 million in cash used for operations. As of June 30, we had $97.3 million in inventory compared to $87.1 million in Q1.</p><p>The increase was driven by additional raw materials purchased for production orders on hand and forecasted orders. We made a total of $5.8 million in capital investments in the quarter, including $5 million in production equipment and machinery, and an immaterial amount on construction and building improvements. This is lower than we had anticipated, primarily due to a COVID-related pause in construction on our new China factory. Note that we expect to resume spending on our new facility in China in Q3, and we anticipate this to be reflected in increased spending on construction and building improvements. Including this resumption in building expenditures and other equipment necessary to increase our production capacity, we expect total 2020 capital expenditures to be approximately $42 million. Although I would caution, as in years past, that this number is likely to be reevaluated as our plans continue to evolve. Before we turn to our outlook, I would like to provide an update on the aftermarket offering we announced in February.</p><p>To date, we have raised $22 million in gross proceeds under this program, including $7.7 million raised in July, which will be reflected in our Q3 financial statements. We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use. Moving now to our Q3 outlook. We expect Q3 revenue to be between $76 million and $83 million and non-GAAP gross margin to be in the range of 25% to 26.5%. Non-GAAP net loss is expected to be in the range of $4.6 million to $0.6 million, and non-GAAP loss per basic share between $0.20 and $0.03 using a weighted average basic share count of approximately 23.4 million shares.</p><p>With that, I will turn it back over to the operator for the Q&A session. Operator?</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-92440">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-92440');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] And the first question will come from Alex Henderson with Needham & Company. Please go ahead.</p><p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p><p>Thank you very much, I appreciate that. I actually have two questions. The first one, the new hyperscale customer, there was a other supplier into that customer, if I believe, which was Inolight and I heard that there are some supply chain disruptions. Do you think that, that's part of the reason that you got in? Or do you think that you would have been in regardless of what the competitor supply availability looks like? And does that have any impact on the way you're thinking about the outlook?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>I can't say that there's anything specific about any of our competitors that would have impacted this customer's decision. I mean it's a customer that we've been working with for some time to gain some traction there. And I think they've appreciated our ability to supply, and obviously the complete profile that we bring to the table with cost and quality and delivery advantages. So I think it was much more about us than about some competitors losing traction there.</p><p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p><p>Glad to hear that. The second question I wanted to delve into the telco piece. I mean it seems pretty clear that what's driving this is the chipsets going into CPRI and front haul for 5G that is a huge potential build over time, not just in China but globally. And I'm assuming that these are chipsets that are selling in there. Can you give us some sense of what the rate of chips that are going into that market looks like? How many are diodes? How many or EMLS? And to what extent you see that ramping from here? And any sense of what the TAM is for that market over the next three, four, five years as that 5G footprint gets billed out?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Yes. So there's a few questions embedded in there. As far as the ratio or the precise types of lasers, I don't have a breakdown on that. I mean it's a combination of DFP lasers that we're selling, some EMLs and but very small and some transceivers. The precise breakdown I don't have available now. As far as the TAM there, it really remains to be seen. I think in China alone, which is where we're seeing the most activity right now. They're talking about tens of millions of towers which would be several many tens of millions of radios, each of which would require a front-haul transceiver.</p><p>So you can kind of get an appreciation that the size of that market is really large. Our anticipation is not that AOI is going to be a majority player or anything like that in that market, but I think that it's very reasonable for us to expect to get 10%, 20% of that market and hopefully expand over time, and as the opportunities in the rest of the world outside of China begin to materialize to continue to grow that market share.</p><p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p><p>If I could just squeeze one last question on that same subject. The impact of this on the utilization rate in your fab, I think is going to be pretty significant. Do you expect to see a couple of points of margin expansion as these volumes ramp relative to the other transceiver business because of the overhead allocation associated with that?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Yes. I mean, I won't comment on the exact magnitude that we expect to see. We have given guidance, of course, that indicates continued improvement in our gross margin. We mentioned that in our prepared remarks as well. You saw the improvement from Q1 to Q2 already. And that's due to a number of factors, but certainly cost reduction overall coming from higher fab utilization is a big part of that. And we would expect that to continue as long as the growth in that chip market continues.</p><p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p><p>Thanks for the answers. And thanks for the great quarter.</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>My pleasure. Thank you.</p><p><strong>Operator</strong></p><p>The next question will come from Simon Leopold with Raymond James. Please go ahead.</p><p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p><p>Great, thank you guys for taking the question. First, just a very quick easy clarification. The percent of Datacom that was 100 gig. Did you say 54% or 64%?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>I'm sorry, you cut out there just a little bit. I think you're asking about the data center revenue that was 100 gig? And if so, that's 64%, 6-4.</p><p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p><p>Great. Sorry about that. I'm a little bit internet and power disadvantaged. So I'll try to speak up and be quick. I wonder if you could maybe bridge the gross margin. It was a little light this quarter on very good revenue. And similarly, like in the guidance, I'm just wondering if you could explain how much of the pressure is COVID expenses? How much maybe is mix if the telecom products are dilutive to the gross margin? Just help us understand those factors?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Sure, Simon. Some of it is COVID, but not a lot. I think the main factor is well, really two things. It's product mix related and it's cost reduction related. Those are in other words, those are the two things that we have two levers that we can pull from here on to try to continue to see improved gross margin. As I mentioned in the previous question or answer to the previous question, the fab utilization helps in terms of improving our cost structure. But just like other ways of reducing the cost over time, it does take time for those to flow through because we have a significant amount of inventory and their cycle time associated with it. So the improvements that we expect to see we believe are real and they're coming, but it takes some time for them to actually materialize in the financial statements.</p><p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p><p>Great. And then just one last one, if I might. The new datacenter 10% customer which is really good news. Is this something you see as sustainable or basically as far as you can forecast? Or was there something onetime about this quarter?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>No. I mean this customer has actually been growing with us for some time slowly, and they just made it into that 10% category this quarter. But I would not expect that to be a flash in the pan type of thing. I think we've done a good job with this customer. The telecom seem like us as a supplier. And barring any unforeseen circumstances, I don't see any reason why they wouldn't continue to purchase from us.</p><p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p><p>Great, thank you for taking the questions.</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>My pleasure.</p><p><strong>Operator</strong></p><p>The next question will come from Paul Silverstein with Cowen. Please go ahead.</p><p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p><p>Thanks for taking the questions. Hopefully, this is different than what Alex and Simon asked you. But on the gross margin front, Stefan, do you have visibility to getting back to 30-plus percent? And if you do, can you give us a sense for when that is? I appreciate that it takes time to flow through for your previous responses, but any visibility right now?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>I mean, I think our goal is still good to get back to the 30-plus percent range. I could see us getting into the upper 20% range by the end of the year. Whether we could hit 30% in that time frame. I mean, I suppose there are some scenarios where that could happen, but that's probably not as likely. But I think we're talking about a matter of quarters, not years, for us to get back to that 30% level.</p><p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p><p>And I trust the competitive dynamics are not meaningfully different today than they were previously, either better or worse?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>No. I mean we haven't seen any real changes in the competitive dynamic.</p><p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p><p>All right. And one other question on margins. From a pricing perspective, I know they reset once to twice per year depending on the customer. I assume that's still true. But in terms of those resets, any insight you can provide in terms of what it's looking like?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Nothing specific. Obviously, we don't give that type of guidance typically. I can't say that we are seeing pretty strong demand right now. And in past situations where we've seen that kind of strong demand, typically, that provides a little more pricing leverage on the suppliers as opposed to the customers. But again, that's just an observation from prior periods. I can't really speculate about the pricing resets that we might see in the future.</p><p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p><p>Understood. One last quick question. I assume my definition, when we're talking about the China 5G opportunity, we're talking about three, maybe four, systems customers that you do or can sell into to access that opportunity in terms of Huawei, ZTE, fiber home and perhaps what was that, Alcatel Shanghai Bell Nokia. Does that go without saying?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Yes. Just I think that's correct in terms of the end customers. Just to be clear, many of our customers, we do sell directly into some of those customers, but many of the customers are Chinese-based transceiver manufacturers that then supply those transceivers. So we would supply laser dots, for example, into those transceiver manufacturers, they would manufacture the transceivers and then sell them to the end customer. So much of our business is likely not to be directly with those big guys. But I would assume, based on my knowledge of the market there, that your list of end customers is accurate.</p><p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p><p>Got it. And did you say how many of those transceiver customers you're selling into? Can you share that with us?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>There's a lot of them. There's probably more than a dozen.</p><p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p><p>That's a it. I'll pass it on. Thank you.</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>No problem.</p><p><strong>Operator</strong></p><p>Our next question will come from Samik Chatterjee with JPMorgan. Please go ahead.</p><p><strong>Bharat Daryani</strong> -- <em>JPMorgan -- Analyst</em></p><p>Yeah, hi, thanks for taking my question. This is Bharat on for Samik. So if I could just start with the datacenter segment. And I think it was just, I think, a couple of quarters ago you highlighted 400-gig. So just wanted to understand what you're seeing there. I mean have you started shipping to that customer already? Have you started to that? And any update on probably when revenue can come from that. So can you think about what are the milestones there?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Samik, I'm sorry to say that your line is very difficult to understand. So I missed that question. Can you try to repeat it?</p><p><strong>Bharat Daryani</strong> -- <em>JPMorgan -- Analyst</em></p><p>Yes. No, so this is Bharat for Samik. So if I could just start on the datacenter segment and 400-gig specifically. So I think it was a couple of quarters ago that you highlighted a design win there with a named customer. So I just wanted to get a sense, have you started to ship to that customer already? And any update on when new recognition can come from that. So what are some of the milestones there that we can track?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Okay. So the question was regarding 400G. We haven't shipped significant quantities to that customer or any other customer or 400G yet. My sense is that the 400G because of COVID, I think some of the 400G qualification efforts are taking longer than expected. And I don't think that's anything unique to AOI. I think the information that we have is that a lot of particularly the hyperscale customers, many of them are working from home, just like many of us, and that complicates qualification efforts because you've got engineers that can't come to the lab or they're otherwise constrained in their ability to complete those qualification efforts. So my sense is that, that 400G revenue is probably pushed out a little bit. But that's not necessarily a bad thing for us either. I mean if you look at our results this quarter, we're seeing very strong uptick in 100G revenue. And I would expect that to continue to be there until such time as 400G is ready.</p><p><strong>Bharat Daryani</strong> -- <em>JPMorgan -- Analyst</em></p><p>Got it. And if I could just ask a follow-up on the telecom end market. I mean can you help us think about what's the run rate revenue you're expecting from that business as we look into the second half? And the reason I ask that is how should we think about like the sustainability of demand of 5G from China? Because as some of the equipment peers have called out that there's a high inventory position across OEM. In fact, that they're back from purchasing in the region in the second half. So I just wanted to understand what the drivers are there as you look into the second half.</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Yes. We don't give breakdown by segment on a forward-looking basis. But I imagine this will be just like any other nascent market, right? There'll probably be some ups and downs as we go forward. But I think the on a quarter-by-quarter basis, you may see some variability there. But I think the overall trend toward increased volumes with this 5G deployment is happening, I think, is pretty clear.</p><p><strong>Bharat Daryani</strong> -- <em>JPMorgan -- Analyst</em></p><p>Okay, got it. Thank you for taking my questions.</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>My pleasure.</p><p><strong>Operator</strong></p><p>The next question will come from Dave Kang with B. Riley. Please go ahead.</p><p><strong>Dave Kang</strong> -- <em>B. Riley -- Analyst</em></p><p>Thanks for taking the questions. I was wondering if you guys could provide more color around new customer wins. Are there any 400G customers that you guys have in the pipeline? Or is that that's pushed out still, kind of how you guys are trending?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Well, as I mentioned before, I think a lot of the 400G qualification efforts are getting pushed out. We did not have any 400G wins this quarter. But I also to be clear, we didn't have any notifications that we are no longer under consideration for 400 G. In other words, we're kind of at the status quo, that is, I think that the qualification efforts have just gotten pushed out and slowed down a little bit with our customers. And that's true for us as well as for any of our competitors. And so and as I said earlier, I think our business is in 100-gig is growing very nicely. And so the 400G delay isn't necessarily a bad thing for us. It gives us some time to work on the cost and manufacturability of those devices. And that can only be a good thing for us when the time comes.</p><p><strong>Dave Kang</strong> -- <em>B. Riley -- Analyst</em></p><p>Okay, thank you.</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>My pleasure.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Our next question will come from Fahad Najam with Cowen. Please go ahead.</p><p><strong>Fahad Najam</strong> -- <em>Cowen -- Analyst</em></p><p>Hi, Stephan, Tom. Thank you for taking my question. much of my questions have already been answered, but I'll ask you a question in terms of any trends you're seeing among your largest hyperscale U.S.-based hyperscale customers of a need to push or pull the supply chain out of China into outside of China, maybe in the U.S., especially given the fact that Microsoft and Amazon, two of your customers, have or have been vying for this significant U.S. government DoD contract. Are you seeing a request or pull-in from your customers to move some of your supply chain out of China? Can you provide some color there?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Well, sure. As we've noted for the last few quarters, we've been producing more and more of our products in Taiwan as opposed to China. And the customers are certainly aware of and supportive of that. I think right now, the focus has largely been due to the tariff situation, not because they necessarily have a mandate to move out of China. As the political situation with China continues to evolve, obviously, that could become more of a factor. But for now, I think it's mainly just the cost reason why they want us to produce more in Taiwan. But it's certainly been a factor of conversation with the customers, yes.</p><p><strong>Fahad Najam</strong> -- <em>Cowen -- Analyst</em></p><p>Can you share with us today how much of your production is outside of China now versus before the tariff situation?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>It's a really difficult question to answer, Fahad, because what we've been doing is we've been moving certain parts of the manufacturing from China to Taiwan, and we've been doing other earlier parts of the manufacturing process in China. So it's not like we've completely moved production from China to Taiwan. It's been more of a reassignment of manufacturing activities between the two plants.</p><p><strong>Fahad Najam</strong> -- <em>Cowen -- Analyst</em></p><p>So related to previous question around gross margin, do you think moving your production or if you settle on to a more settled routine and supply chain payout out of Taiwan, do you think that, that would help your gross margin cost structure going forward? Is that what you were alluding to when you said your cost structure kind of depend on it? Is that driven by the fact that you're still transitioning a lot of your production out of China into Taiwan, and that's driving up some incremental costs over the near term?</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>There's some incremental costs in there, but I actually think, look, the labor cost, for example, in Taiwan is more expensive than China. So on balance, once we hit a steady state here, the gross margin if we can't do significant cost reduction like we have been doing, then the gross margin would tend to trend down because of that. The reason why we think it's going to go up is, again, product mix and very attention very good attention that we're paying to cost of production and the ability to continue to improve our manufacturing, improve our supply chain to get that cost to come down. And that's a big part of what we're expecting in order to see the gross margins get back to that upper 20% and then, ultimately, 30% range.</p><p><strong>Fahad Najam</strong> -- <em>Cowen -- Analyst</em></p><p>Got it. Appreciate the answers. I will step back in the queue.</p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p>Okay.</p><p><strong>Operator</strong></p><p>[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Thompson Lin, Chief Executive Officer, for any closing remarks. Please go ahead.</p><p><strong>Dr. Thompson Lin</strong> -- <em>Founder, President, Chief Executive Officer, and Chairman of the Board</em></p><p>Okay. Thank you for joining us today. As always, thank you to our investors, customers and employees for your continued support, and we look forward to virtually seeing many of you at our upcoming investor conferences. [Operator Closing Remarks]</p><p><strong>Duration: 38 minutes</strong></p><h2>Call participants:</h2><p><strong>Monica Gould</strong> -- <em>Investor Relations</em></p><p><strong>Dr. Thompson Lin</strong> -- <em>Founder, President, Chief Executive Officer, and Chairman of the Board</em></p><p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p><p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p><p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p><p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p><p><strong>Bharat Daryani</strong> -- <em>JPMorgan -- Analyst</em></p><p><strong>Dave Kang</strong> -- <em>B. Riley -- Analyst</em></p><p><strong>Fahad Najam</strong> -- <em>Cowen -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/aaoi">More AAOI analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Applied Optoelectronics, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DApplied%2520Optoelectronics%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=f8c31e12-1fe6-4fc7-9ced-90cfd2ed00ea">ten best stocks</a></strong> for investors to buy right now… and Applied Optoelectronics, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DApplied%2520Optoelectronics%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=f8c31e12-1fe6-4fc7-9ced-90cfd2ed00ea" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-60240", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["AAOI"], "primary_tickers_companies": ["Applied Optoelectronics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Applied Optoelectronics Inc (AAOI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-60240"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-60240", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["AAOI"], "primary_tickers_companies": ["Applied Optoelectronics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Applied Optoelectronics Inc (AAOI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], AAOI earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Applied Optoelectronics Inc</strong> <span class="ticker" data-id="288898">(<a href="https://www.fool.com/quote/nasdaq/applied-optoelectronics-inc/aaoi/">NASDAQ:AAOI</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">10:30 p.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Good day, and welcome to the Applied Optoelectronics' Second Quarter 2020 Earnings Conference Call. [Operator Instructions]</p>, <p>I would now like to turn the conference over to Monica Gould, Investor Relations for Applied Optoelectronics. Please go ahead, ma'am.</p>, <p><strong>Monica Gould</strong> -- <em>Investor Relations</em></p>, <p>Thank you. I'm Monica Gould, Investor Relations for Applied Optoelectronics, and I'm pleased to welcome you to AOI's Second Quarter 2020 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its second quarter 2020 financial results and provided its outlook for the third quarter of 2020. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website that will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 2020.</p>, <p>A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results to differ materially from those anticipated in such forward-looking statements. In some cases, you can identify forward-looking statements by terminologies such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will or thinks. And by other similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the third quarter of 2020.</p>, <p>Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the risk factors section of the company's reports on file with the SEC, including the company's annual report on Form 10-K for the year ended December 31, 2019, and the company's quarterly report on Form 10-Q for the period ended March 31, 2020. Also, with the exception of revenue, all financials discussed today are on a non-GAAP basis, unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.</p>, <p>Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Jefferies 2020 Semiconductor, IT, Hardware and Communications Infrastructure Summit on September 2, and at the H.C. Wainwright 22nd Annual Global Investment Conference on September 15. These discussions will be webcast live, and a link to the webcast will be available on the Investor Relations section of the AOI website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note that the date of our third quarter 2020 earnings call is currently scheduled for November 5, 2020.</p>, <p>Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?</p>, <p><strong>Dr. Thompson Lin</strong> -- <em>Founder, President, Chief Executive Officer, and Chairman of the Board</em></p>, <p>Thank you, Monica, and thank you, everyone, for joining us today. First, I would like to once again thank our entire AOI team that has continued to support one another and our customers during the COVID-19 pandemic. Our condolences go out to all those around the world who have been impacted by the virus, and we send our thanks to the first responders and essential workers who continue to protect and support our communities. Turning to the quarter, AOI delivered Q2 revenue of $65.2 million, which was above our guidance of $55 million to $60 million. Q2 revenue grew 50% compared to the second quarter last year at 61% sequentially, marking the fourth quarter of year-over-year growth that AOI has recorded since the third quarter of 2017. Our performance was driven by improved demand from our new customers, increase customer diversifications and record revenue in our telecom segment led by 5G deployments in China. Non-GAAP gross margin of 23.1% was on the lower end of our expected guidance range due to product mix as well as some COVID-19-related expenses that continued into the quarter, while non-GAAP net loss of $0.24 per share was in line with our expectations.</p>, <p>We expect that continued improvement through our cost reduction efforts and more favorable product mix will lead to improving gross margin over the next several quarters. And we anticipate revenue to be up more than 20% sequentially at the midpoint of r guidance range. We are encouraged by the increased datacenter demand from a diverse set of customers and improving 5G-related activity that began earlier this year and will continue into Q3. During the quarter, we have had design wins, including four with telecom customers which are related to 5G network deployments, mainly in China. The other four design wins were with existing customers in our datacenter segment. Additionally, we are pleased to report that we saw increased demand for our 100G products in Q2. Total revenue for 100G products increased almost 350% from the same period last year, marking the second quarter in a row of year-over-year growth in 100G sales.</p>, <p>During the second quarter, we saw significant improvement in our telecom and cable sectors. Revenue in our telecom segment more than doubled sequentially and outpaced our CATV business. Driven by increased 5G activity, our cable segment improved sequentially as we began to see increased order flow for product-related to CATV upgrades in North America. We are pleased to be project we received our fourth significant orders for CATV products related to MSO upgrades in Q2, which will begin to ship in Q3. As we stated in our previous earnings calls, we have taken various actions to ensure the safety and well-being of our employees who all continue to support our customer needs and the needs of the communities in which we operate. Our offices and factories around the world are back to normal operation due to our strict adherence to health and safety recommendations. Looking ahead, we'll continue to digitally enforce these health precautions to protect the welfare of our employees and our communities.</p>, <p>With that, I will turn the call over to Stefan to review the details of our Q2 performance and outlook for Q3. Stefan?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>Thank you, Thompson. As you may recall, we had disruptions in operations in our China factory during Q1. However, as Thompson mentioned, due to the hard work and dedication of our employees and supply chain partners, we are back to normal operations and have increased capacity in both our wafer fab in Sugar Land as well as our factories in China and Taiwan compared to our capacity pre-COVID. We continue to see high demand from our datacenter customers who remain focused on improving network performance in light of the increased traffic related to the shift toward working from home. We also received our first orders from CATV customers that we believe are related to network upgrades by MSOs also responding to stresses on their networks. Looking ahead to Q3. We are expecting over 20% sequential growth at the midpoint of our guidance range and a continued improvement in our gross margin. Turning to our quarterly performance.</p>, <p>Total revenue for the second quarter was $65.2 million, which was above our guidance range. Our datacenter revenue rose 58% sequentially and 65% year-over-year to $52.6 million and accounted for 81% of our total revenue. This was our highest datacenter revenue quarter in two years. In the second quarter, 33% of our datacenter revenue was from our 40G transceiver products, and 64% was from our 100G products. As Thompson noted, this marks the second quarter in a row of year-over-year growth in our 100G transceivers. Importantly, we continued to see increased data center demand during Q2 from a diverse set of customers. Overall, for the quarter, our top 10 customers represented 86.9% of revenue which is down from 90.9% in Q2 of last year. We had three 10% or greater customers in the quarter, all of which were in the datacenter segment. These customers contributed 35% and 15% and 12% of total revenue, respectively. One of these data center customers was a new 10% customer for AOI, where we have been gaining share.</p>, <p>This new customer is a U.S.-based hyperscale cloud operator that has primarily been purchasing our 100G transceivers. We also have seen increasing revenue from a large U.S.-based switch router vendor who approached the 10% revenue mark this quarter. Rounding out our top five customers was a data center customer in China. Looking at our customer base as a whole, in addition to the 10% or greater customers, we had three other customers who each contributed between 5% and 10% of total revenue. To put this in some context, in Q2 of last year, we had only two 10% or greater customers and one customer between 5% and 10%. Now we have six customers each over 5%, and we are pleased to see that our efforts in diversifying our customer base continue to show tangible results and that many of these new customers are contributing meaningfully to our results. In addition to the market diversity, our top 10 customers are also geographically diverse. Out of our 5% or greater customers in Q2, all but one were U.S.-based multinationals, and the remaining one was a China-based switch router vendor primarily serving the data center market.</p>, <p>Looking at our top 10 customers in Q2, seven were U.S.-based multinational corporations, two were based in China and one in Europe. Turning to our cable television product segment. We were able to resume manufacturing at a normal capacity during the quarter and recorded a sequential revenue increase of 45% to $6.1 million or 9% of total revenue. However, CATV revenue remains below the $9.8 million we recorded in Q2 of last year. The sequential increase was driven by an increased order flow in North America for cable TV upgrades. As I noted earlier, we saw our first significant orders for CATV upgrades driven by the shift to working from home this quarter, which we will recognize as revenue in Q3. For the remainder of the year, we expect to ramp up production to meet order demand. Revenue from our telecom products rose to a record $6.2 million and accounted for 10% of total revenue, reflecting an increase of 141% from the first quarter and 279% from Q2 of last year.</p>, <p>These results continue to be driven by increased 5G demand in China. Based on current order trends, we expect to see continued strong sequential growth in CATV and telecom revenue in Q3. In Q2, we generated non-GAAP gross margin of 23.1% compared to 27.2% in Q2 of the prior year. Gross margin was at the low end of our guidance range of 23% to 25% due to unfavorable product mix, mostly in our data center segment, along with increased costs, including manufacturing and shipping costs related to COVID. We expect gross margins to recover to pre-COVID levels as we implement cost reductions that were delayed by the pandemic. We also expect to see improvements in our product mix that we anticipate will improve our gross margin. Total non-GAAP operating expenses in the second quarter were $20.6 million or 31.6% of revenue compared with $19.5 million or 44.9% of revenue in the same quarter last year. Operating expenses increased from last year due mainly to increased shipping costs, sales commissions and insurance costs.</p>, <p>Non-GAAP operating loss in the second quarter was $5.6 million compared to an operating loss of $7.7 million in Q2 of last year. GAAP net loss for Q2 was $18.6 million or a loss of $0.89 per basic share compared with a GAAP net loss of $11.4 million or $0.57 per basic share in Q2 of last year. On a non-GAAP basis, net loss for Q2 was $5 million or a loss of $0.24 per basic share, which was in line with our guidance range of a loss of $4.10 to $5.7 million or a loss of $0.20 to $0.28 per basic share, and compares to a net loss of $5.2 million or a loss of $0.26 per basic share in Q2 of last year. The basic shares outstanding used for computing the net loss in Q2 were $20.9 million. Turning now to the balance sheet. We ended the second quarter with $58.9 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $62.5 million at the end of the first quarter and reflects $15.5 million in cash used for operations. As of June 30, we had $97.3 million in inventory compared to $87.1 million in Q1.</p>, <p>The increase was driven by additional raw materials purchased for production orders on hand and forecasted orders. We made a total of $5.8 million in capital investments in the quarter, including $5 million in production equipment and machinery, and an immaterial amount on construction and building improvements. This is lower than we had anticipated, primarily due to a COVID-related pause in construction on our new China factory. Note that we expect to resume spending on our new facility in China in Q3, and we anticipate this to be reflected in increased spending on construction and building improvements. Including this resumption in building expenditures and other equipment necessary to increase our production capacity, we expect total 2020 capital expenditures to be approximately $42 million. Although I would caution, as in years past, that this number is likely to be reevaluated as our plans continue to evolve. Before we turn to our outlook, I would like to provide an update on the aftermarket offering we announced in February.</p>, <p>To date, we have raised $22 million in gross proceeds under this program, including $7.7 million raised in July, which will be reflected in our Q3 financial statements. We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use. Moving now to our Q3 outlook. We expect Q3 revenue to be between $76 million and $83 million and non-GAAP gross margin to be in the range of 25% to 26.5%. Non-GAAP net loss is expected to be in the range of $4.6 million to $0.6 million, and non-GAAP loss per basic share between $0.20 and $0.03 using a weighted average basic share count of approximately 23.4 million shares.</p>, <p>With that, I will turn it back over to the operator for the Q&A session. Operator?</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-92440">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-92440');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] And the first question will come from Alex Henderson with Needham & Company. Please go ahead.</p>, <p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>Thank you very much, I appreciate that. I actually have two questions. The first one, the new hyperscale customer, there was a other supplier into that customer, if I believe, which was Inolight and I heard that there are some supply chain disruptions. Do you think that, that's part of the reason that you got in? Or do you think that you would have been in regardless of what the competitor supply availability looks like? And does that have any impact on the way you're thinking about the outlook?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>I can't say that there's anything specific about any of our competitors that would have impacted this customer's decision. I mean it's a customer that we've been working with for some time to gain some traction there. And I think they've appreciated our ability to supply, and obviously the complete profile that we bring to the table with cost and quality and delivery advantages. So I think it was much more about us than about some competitors losing traction there.</p>, <p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>Glad to hear that. The second question I wanted to delve into the telco piece. I mean it seems pretty clear that what's driving this is the chipsets going into CPRI and front haul for 5G that is a huge potential build over time, not just in China but globally. And I'm assuming that these are chipsets that are selling in there. Can you give us some sense of what the rate of chips that are going into that market looks like? How many are diodes? How many or EMLS? And to what extent you see that ramping from here? And any sense of what the TAM is for that market over the next three, four, five years as that 5G footprint gets billed out?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>Yes. So there's a few questions embedded in there. As far as the ratio or the precise types of lasers, I don't have a breakdown on that. I mean it's a combination of DFP lasers that we're selling, some EMLs and but very small and some transceivers. The precise breakdown I don't have available now. As far as the TAM there, it really remains to be seen. I think in China alone, which is where we're seeing the most activity right now. They're talking about tens of millions of towers which would be several many tens of millions of radios, each of which would require a front-haul transceiver.</p>, <p>So you can kind of get an appreciation that the size of that market is really large. Our anticipation is not that AOI is going to be a majority player or anything like that in that market, but I think that it's very reasonable for us to expect to get 10%, 20% of that market and hopefully expand over time, and as the opportunities in the rest of the world outside of China begin to materialize to continue to grow that market share.</p>, <p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>If I could just squeeze one last question on that same subject. The impact of this on the utilization rate in your fab, I think is going to be pretty significant. Do you expect to see a couple of points of margin expansion as these volumes ramp relative to the other transceiver business because of the overhead allocation associated with that?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>Yes. I mean, I won't comment on the exact magnitude that we expect to see. We have given guidance, of course, that indicates continued improvement in our gross margin. We mentioned that in our prepared remarks as well. You saw the improvement from Q1 to Q2 already. And that's due to a number of factors, but certainly cost reduction overall coming from higher fab utilization is a big part of that. And we would expect that to continue as long as the growth in that chip market continues.</p>, <p><strong>Alex Henderson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>Thanks for the answers. And thanks for the great quarter.</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>My pleasure. Thank you.</p>, <p><strong>Operator</strong></p>, <p>The next question will come from Simon Leopold with Raymond James. Please go ahead.</p>, <p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p>, <p>Great, thank you guys for taking the question. First, just a very quick easy clarification. The percent of Datacom that was 100 gig. Did you say 54% or 64%?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>I'm sorry, you cut out there just a little bit. I think you're asking about the data center revenue that was 100 gig? And if so, that's 64%, 6-4.</p>, <p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p>, <p>Great. Sorry about that. I'm a little bit internet and power disadvantaged. So I'll try to speak up and be quick. I wonder if you could maybe bridge the gross margin. It was a little light this quarter on very good revenue. And similarly, like in the guidance, I'm just wondering if you could explain how much of the pressure is COVID expenses? How much maybe is mix if the telecom products are dilutive to the gross margin? Just help us understand those factors?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>Sure, Simon. Some of it is COVID, but not a lot. I think the main factor is well, really two things. It's product mix related and it's cost reduction related. Those are in other words, those are the two things that we have two levers that we can pull from here on to try to continue to see improved gross margin. As I mentioned in the previous question or answer to the previous question, the fab utilization helps in terms of improving our cost structure. But just like other ways of reducing the cost over time, it does take time for those to flow through because we have a significant amount of inventory and their cycle time associated with it. So the improvements that we expect to see we believe are real and they're coming, but it takes some time for them to actually materialize in the financial statements.</p>, <p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p>, <p>Great. And then just one last one, if I might. The new datacenter 10% customer which is really good news. Is this something you see as sustainable or basically as far as you can forecast? Or was there something onetime about this quarter?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>No. I mean this customer has actually been growing with us for some time slowly, and they just made it into that 10% category this quarter. But I would not expect that to be a flash in the pan type of thing. I think we've done a good job with this customer. The telecom seem like us as a supplier. And barring any unforeseen circumstances, I don't see any reason why they wouldn't continue to purchase from us.</p>, <p><strong>Simon Leopold</strong> -- <em>Raymond James -- Analyst</em></p>, <p>Great, thank you for taking the questions.</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>My pleasure.</p>, <p><strong>Operator</strong></p>, <p>The next question will come from Paul Silverstein with Cowen. Please go ahead.</p>, <p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p>, <p>Thanks for taking the questions. Hopefully, this is different than what Alex and Simon asked you. But on the gross margin front, Stefan, do you have visibility to getting back to 30-plus percent? And if you do, can you give us a sense for when that is? I appreciate that it takes time to flow through for your previous responses, but any visibility right now?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>I mean, I think our goal is still good to get back to the 30-plus percent range. I could see us getting into the upper 20% range by the end of the year. Whether we could hit 30% in that time frame. I mean, I suppose there are some scenarios where that could happen, but that's probably not as likely. But I think we're talking about a matter of quarters, not years, for us to get back to that 30% level.</p>, <p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p>, <p>And I trust the competitive dynamics are not meaningfully different today than they were previously, either better or worse?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>No. I mean we haven't seen any real changes in the competitive dynamic.</p>, <p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p>, <p>All right. And one other question on margins. From a pricing perspective, I know they reset once to twice per year depending on the customer. I assume that's still true. But in terms of those resets, any insight you can provide in terms of what it's looking like?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>Nothing specific. Obviously, we don't give that type of guidance typically. I can't say that we are seeing pretty strong demand right now. And in past situations where we've seen that kind of strong demand, typically, that provides a little more pricing leverage on the suppliers as opposed to the customers. But again, that's just an observation from prior periods. I can't really speculate about the pricing resets that we might see in the future.</p>, <p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p>, <p>Understood. One last quick question. I assume my definition, when we're talking about the China 5G opportunity, we're talking about three, maybe four, systems customers that you do or can sell into to access that opportunity in terms of Huawei, ZTE, fiber home and perhaps what was that, Alcatel Shanghai Bell Nokia. Does that go without saying?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>Yes. Just I think that's correct in terms of the end customers. Just to be clear, many of our customers, we do sell directly into some of those customers, but many of the customers are Chinese-based transceiver manufacturers that then supply those transceivers. So we would supply laser dots, for example, into those transceiver manufacturers, they would manufacture the transceivers and then sell them to the end customer. So much of our business is likely not to be directly with those big guys. But I would assume, based on my knowledge of the market there, that your list of end customers is accurate.</p>, <p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p>, <p>Got it. And did you say how many of those transceiver customers you're selling into? Can you share that with us?</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>There's a lot of them. There's probably more than a dozen.</p>, <p><strong>Paul Silverstein</strong> -- <em>Cowen -- Analyst</em></p>, <p>That's a it. I'll pass it on. Thank you.</p>, <p><strong>Dr. Stefan Murry</strong> -- <em>Chief Financial Officer and Chief Strategy Officer</em></p>, <p>No problem.</p>, <p><strong>Operator</strong></p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-60240", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["AAOI"], "primary_tickers_companies": ["Applied Optoelectronics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Applied Optoelectronics Inc (AAOI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-60240"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-60240", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["AAOI"], "primary_tickers_companies": ["Applied Optoelectronics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Applied Optoelectronics Inc (AAOI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | AAOI earnings call for the period ending June 30, 2020. | I would now like to turn the conference over to Monica Gould, Investor Relations for Applied Optoelectronics. Please go ahead, ma'am.\n Thank you. I'm Monica Gould, Investor Relations for Applied Optoelectronics, and I'm pleased to welcome you to AOI's Second Quarter 2020 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its second quarter 2020 financial results and provided its outlook for the third quarter of 2020. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website that will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 2020.\n A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results to differ materially from those anticipated in such forward-looking statements. In some cases, you can identify forward-looking statements by terminologies such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will or thinks. And by other similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the third quarter of 2020.\n Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the risk factors section of the company's reports on file with the SEC, including the company's annual report on Form 10-K for the year ended December 31, 2019, and the company's quarterly report on Form 10-Q for the period ended March 31, 2020. Also, with the exception of revenue, all financials discussed today are on a non-GAAP basis, unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.\n Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Jefferies 2020 Semiconductor, IT, Hardware and Communications Infrastructure Summit on September 2, and at the H.C. Wainwright 22nd Annual Global Investment Conference on September 15. These discussions will be webcast live, and a link to the webcast will be available on the Investor Relations section of the AOI website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note that the date of our third quarter 2020 earnings call is currently scheduled for November 5, 2020.\n Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?\n Thank you, Monica, and thank you, everyone, for joining us today. First, I would like to once again thank our entire AOI team that has continued to support one another and our customers during the COVID-19 pandemic. Our condolences go out to all those around the world who have been impacted by the virus, and we send our thanks to the first responders and essential workers who continue to protect and support our communities. Turning to the quarter, AOI delivered Q2 revenue of $65.2 million, which was above our guidance of $55 million to $60 million. Q2 revenue grew 50% compared to the second quarter last year at 61% sequentially, marking the fourth quarter of year-over-year growth that AOI has recorded since the third quarter of 2017. Our performance was driven by improved demand from our new customers, increase customer diversifications and record revenue in our telecom segment led by 5G deployments in China. Non-GAAP gross margin of 23.1% was on the lower end of our expected guidance range due to product mix as well as some COVID-19-related expenses that continued into the quarter, while non-GAAP net loss of $0.24 per share was in line with our expectations.\n We expect that continued improvement through our cost reduction efforts and more favorable product mix will lead to improving gross margin over the next several quarters. And we anticipate revenue to be up more than 20% sequentially at the midpoint of r guidance range. We are encouraged by the increased datacenter demand from a diverse set of customers and improving 5G-related activity that began earlier this year and will continue into Q3. During the quarter, we have had design wins, including four with telecom customers which are related to 5G network deployments, mainly in China. The other four design wins were with existing customers in our datacenter segment. Additionally, we are pleased to report that we saw increased demand for our 100G products in Q2. Total revenue for 100G products increased almost 350% from the same period last year, marking the second quarter in a row of year-over-year growth in 100G sales.\n During the second quarter, we saw significant improvement in our telecom and cable sectors. Revenue in our telecom segment more than doubled sequentially and outpaced our CATV business. Driven by increased 5G activity, our cable segment improved sequentially as we began to see increased order flow for product-related to CATV upgrades in North America. We are pleased to be project we received our fourth significant orders for CATV products related to MSO upgrades in Q2, which will begin to ship in Q3. As we stated in our previous earnings calls, we have taken various actions to ensure the safety and well-being of our employees who all continue to support our customer needs and the needs of the communities in which we operate. Our offices and factories around the world are back to normal operation due to our strict adherence to health and safety recommendations. Looking ahead, we'll continue to digitally enforce these health precautions to protect the welfare of our employees and our communities.\n With that, I will turn the call over to Stefan to review the details of our Q2 performance and outlook for Q3. Stefan?\n Thank you, Thompson. As you may recall, we had disruptions in operations in our China factory during Q1. However, as Thompson mentioned, due to the hard work and dedication of our employees and supply chain partners, we are back to normal operations and have increased capacity in both our wafer fab in Sugar Land as well as our factories in China and Taiwan compared to our capacity pre-COVID. We continue to see high demand from our datacenter customers who remain focused on improving network performance in light of the increased traffic related to the shift toward working from home. We also received our first orders from CATV customers that we believe are related to network upgrades by MSOs also responding to stresses on their networks. Looking ahead to Q3. We are expecting over 20% sequential growth at the midpoint of our guidance range and a continued improvement in our gross margin. Turning to our quarterly performance.\n Total revenue for the second quarter was $65.2 million, which was above our guidance range. Our datacenter revenue rose 58% sequentially and 65% year-over-year to $52.6 million and accounted for 81% of our total revenue. This was our highest datacenter revenue quarter in two years. In the second quarter, 33% of our datacenter revenue was from our 40G transceiver products, and 64% was from our 100G products. As Thompson noted, this marks the second quarter in a row of year-over-year growth in our 100G transceivers. Importantly, we continued to see increased data center demand during Q2 from a diverse set of customers. Overall, for the quarter, our top 10 customers represented 86.9% of revenue which is down from 90.9% in Q2 of last year. We had three 10% or greater customers in the quarter, all of which were in the datacenter segment. These customers contributed 35% and 15% and 12% of total revenue, respectively. One of these data center customers was a new 10% customer for AOI, where we have been gaining share.\n This new customer is a U.S.-based hyperscale cloud operator that has primarily been purchasing our 100G transceivers. We also have seen increasing revenue from a large U.S.-based switch router vendor who approached the 10% revenue mark this quarter. Rounding out our top five customers was a data center customer in China. Looking at our customer base as a whole, in addition to the 10% or greater customers, we had three other customers who each contributed between 5% and 10% of total revenue. To put this in some context, in Q2 of last year, we had only two 10% or greater customers and one customer between 5% and 10%. Now we have six customers each over 5%, and we are pleased to see that our efforts in diversifying our customer base continue to show tangible results and that many of these new customers are contributing meaningfully to our results. In addition to the market diversity, our top 10 customers are also geographically diverse. Out of our 5% or greater customers in Q2, all but one were U.S.-based multinationals, and the remaining one was a China-based switch router vendor primarily serving the data center market.\n Looking at our top 10 customers in Q2, seven were U.S.-based multinational corporations, two were based in China and one in Europe. Turning to our cable television product segment. We were able to resume manufacturing at a normal capacity during the quarter and recorded a sequential revenue increase of 45% to $6.1 million or 9% of total revenue. However, CATV revenue remains below the $9.8 million we recorded in Q2 of last year. The sequential increase was driven by an increased order flow in North America for cable TV upgrades. As I noted earlier, we saw our first significant orders for CATV upgrades driven by the shift to working from home this quarter, which we will recognize as revenue in Q3. For the remainder of the year, we expect to ramp up production to meet order demand. Revenue from our telecom products rose to a record $6.2 million and accounted for 10% of total revenue, reflecting an increase of 141% from the first quarter and 279% from Q2 of last year.\n These results continue to be driven by increased 5G demand in China. Based on current order trends, we expect to see continued strong sequential growth in CATV and telecom revenue in Q3. In Q2, we generated non-GAAP gross margin of 23.1% compared to 27.2% in Q2 of the prior year. Gross margin was at the low end of our guidance range of 23% to 25% due to unfavorable product mix, mostly in our data center segment, along with increased costs, including manufacturing and shipping costs related to COVID. We expect gross margins to recover to pre-COVID levels as we implement cost reductions that were delayed by the pandemic. We also expect to see improvements in our product mix that we anticipate will improve our gross margin. Total non-GAAP operating expenses in the second quarter were $20.6 million or 31.6% of revenue compared with $19.5 million or 44.9% of revenue in the same quarter last year. Operating expenses increased from last year due mainly to increased shipping costs, sales commissions and insurance costs.\n Non-GAAP operating loss in the second quarter was $5.6 million compared to an operating loss of $7.7 million in Q2 of last year. GAAP net loss for Q2 was $18.6 million or a loss of $0.89 per basic share compared with a GAAP net loss of $11.4 million or $0.57 per basic share in Q2 of last year. On a non-GAAP basis, net loss for Q2 was $5 million or a loss of $0.24 per basic share, which was in line with our guidance range of a loss of $4.10 to $5.7 million or a loss of $0.20 to $0.28 per basic share, and compares to a net loss of $5.2 million or a loss of $0.26 per basic share in Q2 of last year. The basic shares outstanding used for computing the net loss in Q2 were $20.9 million. Turning now to the balance sheet. We ended the second quarter with $58.9 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $62.5 million at the end of the first quarter and reflects $15.5 million in cash used for operations. As of June 30, we had $97.3 million in inventory compared to $87.1 million in Q1.\n The increase was driven by additional raw materials purchased for production orders on hand and forecasted orders. We made a total of $5.8 million in capital investments in the quarter, including $5 million in production equipment and machinery, and an immaterial amount on construction and building improvements. This is lower than we had anticipated, primarily due to a COVID-related pause in construction on our new China factory. Note that we expect to resume spending on our new facility in China in Q3, and we anticipate this to be reflected in increased spending on construction and building improvements. Including this resumption in building expenditures and other equipment necessary to increase our production capacity, we expect total 2020 capital expenditures to be approximately $42 million. Although I would caution, as in years past, that this number is likely to be reevaluated as our plans continue to evolve. Before we turn to our outlook, I would like to provide an update on the aftermarket offering we announced in February.\n To date, we have raised $22 million in gross proceeds under this program, including $7.7 million raised in July, which will be reflected in our Q3 financial statements. We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use. Moving now to our Q3 outlook. We expect Q3 revenue to be between $76 million and $83 million and non-GAAP gross margin to be in the range of 25% to 26.5%. Non-GAAP net loss is expected to be in the range of $4.6 million to $0.6 million, and non-GAAP loss per basic share between $0.20 and $0.03 using a weighted average basic share count of approximately 23.4 million shares.\n With that, I will turn it back over to the operator for the Q&A session. Operator?\n | Applied Optoelectronics Inc | (NASDAQ:AAOI) | Aug 7, 2020 | 10:30 p.m. ET | 10 | pm | 2020-08-07 | 2020-08-10 | 2020-08-07 | 2020-08-11 | NASDAQ | These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results to differ materially from those anticipated in such forward-looking statements. | These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results to differ materially from those anticipated in such forward-looking statements. | [0.0408031 0.8717963 0.08740059] | negative | -0.830993 | 2020-08-11 | 15.890000 | 15.910000 | 13.720000 | 13.820000 | 1967423.0 | 14.010000 | 14.520000 | 13.450000 | 13.570000 | 1292958.0 | Communications | 2020-06-30 | 2020-06-30 | -0.24 | -0.258172 | 2020-06-30 | AAOI | 0.018172 | beat | -2.320001 | decrease | 0 | positive |
| 1 | AAON | /earnings/call-transcripts/2020/08/07/aaon-inc-aaon-q2-2020-earnings-call-transcript.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Aaon Inc</strong> <span class="ticker" data-id="202684">(<a href="https://www.fool.com/quote/nasdaq/aaon-inc/aaon/">NASDAQ:AAON</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">10:15 p.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the AAON, Inc. second quarter sales and earnings call. [Operator Instructions]</p><p>I would now like to hand the conference over to your first presenter, Mr. Gary Fields. The floor is yours. You may begin.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Good afternoon. I'd like to begin by reading a forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control, that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q. So now I'd like to begin with telling you a little bit about our experience with coronavirus and how it's affected our business. First of all, and of utmost importance, is to thank our employees. We've been able to maintain continuous operations. As a result, we have been able to assist with many COVID-19 projects. We are this is vital to our business as an essential business and essential business supplier. I'm very proud of the effort that our employees have gone too to maintain safety in the plant. They are all wearing masks, social distancing. They're doing temperature scans on arrival and at any point in time throughout the day that they feel like that it's necessary. When they clock in, in the mornings or in the evenings, whichever at the beginning of their shift, they certify through a wellness reporting system in our clock in. So we did have some absenteeism because of coronavirus. In June, we had about the second week of June, we had a substantial decline in attendance. It bottomed out in mid-June was mostly restored in the second week of July. Very happy to say that we had very good results with our people returning to work healthy and this was a temporary impact for that period of time I described. And we are mostly recovered on attendance, and these people came back very healthy, ready to work.</p><p>Now I'd like to turn the call over to Scott Asbjornson, our Chief Financial Officer.</p><p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p><p>I'd like to begin by discussing the comparative results of the three months ended June 30, 2020, versus June 30, 2019. Net sales were up 5.2% to $125.6 million from $119.4 million. Net sales for the quarter are up due primarily to our increased sheet mill production from the additional cell vanina machines of replaced in operation as well as our price increases implemented in 2019. Our gross profit increased 26.2% to $38.1 million from $30.2 million. As a percentage of sales, gross profit was 30.4% in the quarter just ended compared to 25.3% in 2019. We continue to see overall raw material cost decrease. The company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs. Selling, general and administrative expenses increased 23.4% to $15.9 million from $12.9 million in 2019. Additionally, as a percentage of sales, SG&A increased to 12.7% of total sales in the quarter just ended from 10.8% in 2019. SG&A is up due to increases in profit-sharing, employee incentives, driven by increased earnings and largely to a $1.25 million contribution to Winefred mont in public schools on behalf of Norman Asbjornson in recognition for his transition from CEO to Executive Chairman. This equates to roughly $0.025 per share. Income from operations increased 28.4% to $22.2 million or 17.7% of sales from $17.3 million or 14.5% of sales in 2019. Our effective tax rate decreased to 20% from 22.7%. The company's estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 25.1%. Net income increased to $17.8 million or 14.2% of sales compared to $13.4 million or 11.2% of sales in 2019. Diluted earnings per share increased by 36% to $0.34 per share from $0.25 per share.</p><p>Diluted earnings per share were based on 52,750,000 shares versus 52,747,000 shares in the same period a year ago. Now for the comparative results of six months ended June 30, 2020 versus June 30, 2019. Net sales were up 12.8% to $263.1 million from $233.3 million net sales for the quarter are up due primarily to our increased cheap mobile production from the additional Salvini machines that were placed into operation. Our gross profit increased 45.7% and to $81.1 million from $55.6 million. As a percentage of sales, gross profit was 30.8% in the quarter just ended compared to 23.9% in 2019. And as already noted, we have experienced decreased material costs and improved overhead absorption. Selling, general and administrative expenses increased 17.2% and to $31.2 million from $26.6 million in 2019. Additionally, as a percentage of sales, SG&A increased to 11.8% of total sales in the quarter just ended from 11.4% in 2019. Income from operations increased 73.8% to $50 million or 19% of sales from $28.8 million or 12.3% of sales in 2019. Our effective tax rate decreased to 20.8% from 23.1%. The company's estimated annual 2020 effective tax rate excluding discrete events, is expected to be approximately 25.1%. And net income increased to $39.7 million or 15.1% of sales compared to $22.1 million or 9.5% of sales in 2019. The diluted earnings per share increased by 78.6% to $0.75 per share from $0.42 per share. Diluted earnings per share were based on 52,885,000 shares versus 52,589,000 shares in the same period a year ago.</p><p>At this time, I would like to turn the call over to Rebecca Thompson, Chief Accounting Officer and Treasury.</p><p><strong>Rebecca A. Thompson</strong> -- <em>Chief Accounting Officer and Treasurer</em></p><p>Thank you, Scott. Looking with the balance sheet, you'll see that we had a working capital balance of $143.2 million versus $131.5 million at December 31, 2019. Unrestricted cash totaled $61.3 million at June 30, 2020. Our current ratio is approximately 2.9:1. Our capital expenditures were $33.5 million. We expect capital expenditures for the year to be approximately $73.2 million. The company had stock repurchases of $15.9 million during the six months ended June 30, 2020. Shareholders' equity per diluted share is $6.1 at June 30, 2020, compared to $5.51 at December 31, 2019.</p><p>I'd now like to turn the call back over to our CEO and President, Gary Fields Field.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>So net sales have increased. This is due, by and large, as Scott mentioned earlier, to the Salvagnini machines that allowed us to produce the sheet metal required to build our units. So once we produce the sheet metal, then it becomes more impacted by human activity. So absent of the time frame through June and the first week or two of July, we have been producing on a daily basis at a record pace, the highest production numbers per day. So once absenteeism is stabilized, which has begun to do quite well. We're nearly restored on that. So we believe that our production has also stabilized. Of course, this coronavirus is such a quick thing that can impact you. I suppose it could occur again. But we've done pretty well with that so the projects that we have produced in relation to coronavirus, we've talked about last quarter, some of those for New York. There's also been some other facilities that we produced equipment for that, for instance, in the state of Maine, there's a company up there that manufactures the swabs that are used for testing. They've expanded their facility substantially. We've already supplied quite a few units to them for their first expansion. And I think we're closing in on an order for another expansion that they have planned. They were very happy with what we did on the first one. So that's kind of the the jobs that are directly related. There's been a lot of indirect relationship in that there's been some community hospitals that have come out of mothballs that we've been able to provide some equipment to help renovate and update these.</p><p>There's been a myriad of facilities that are as a result of coronavirus, there was an awareness on the need to get these facilities up and going. The other thing we're seeing good activity on, and we're very well positioned with our equipment for is increased vigilance on indoor air quality. The coronavirus is well-known to be a aerosol transmitted virus and so if you have the ability to do two things: one is capture that so that it's not recirculated. And two is if you have the ability to kill that virus inside the unit. And so we have strategies that have assisted with that with higher levels of filtration and different methods utilized. There's been two or three methods utilized to help reduce the live virus that's circulated. We're fairly unique in that regard in that our basic design of our the air side of our equipment has additional static pressure capabilities to overcome the static pressure requirements of these higher filtration levels that ash Ray has recommended. So this, again, positions us very well. Mentioned before that absenteeism had an impact on production. We've restored that now. So we're producing again at daily numbers that are on par with the best daily numbers we've ever achieved. Sales coming in the door, bookings we saw a decline throughout the spring and the early summer versus our expectations and versus 2019. However, July turned around substantially. We finished July's bookings substantially above 2019 and more in alignment with our expectations prior to coronavirus. We've also looked at activities that are in the pipeline with our sales channel partners and believe that we're poised for fairly solid results going through the next period of time here. At least for another quarter or two as far as bookings. I think with the political environment, election and so forth, that there could be some debate on how well that's going to occur in Q4, Q1. And I think that a lot of states that opened up early on and got some activities going seen a little pause in opening and some have even contracted a bit. So these are things that are very unpredictable.</p><p>So it's very hard to give a solid direction that things are going, but our backlog remains very stable, very strong. And it's nearing our ideal point so that our lead times are nearing their ideal point as well. Water-source heat pumps, there's not been a whole lot of change in that business. We saw a little weaker demand it for so far this year than what we did in 2019. But we've began with some strategies to strengthen that in primarily in the aftermarket replacement business, looking at what makes a more effective presentation of product for that. And we're in the midst of designing some additional product that's more ideal for that backwardly compatible replacement market, such that if somebody has a failure that they don't want to repair the unit, you've got an instant change out for them. So that's some of our redesign that we've done in that regard our legacy products, as I would like to term them the products that we build in Longview Tex is the products that we build here in Telsa prior to this water-source heat pump. Under constant development for improvement. We've got a multitude of strategies and improvements that are rolling out on a weekly to monthly basis. And we believe that each one of these is going to have a positive impact on our growth potential and our market share growth. So at this point in time, we've seen everything relatively in line with past relationships as far as size of units and so forth. But I would like to point out that there's a couple of opportunities that we've been able to capture. And I think there's more on the horizon. And that is that there's some conditioned warehouses. These are warehouses that require air conditioning. They tend to be very large buildings that they utilize larger units. So you don't have a large quantity of units, you have larger tonnage. And this falls very well into our offerings. Some of our competitors are very limited on the size range they have. And so this has been able to provide us a really good opportunity. Some of those orders are already in-house. We have some more in the pipeline that are very, very significant.</p><p>But manufacturing is the same time. We've seen some acceleration in manufacturing project opportunities, some of which we've capitalized on. I mentioned once before that we were awarded the contract to supply the air conditioning equipment for the new Black & Decker Craftsman tools manufacturing in North Texas. We have other manufacturing facilities, some of which are we don't want to talk about individual projects so much when they're in the pipeline, but there are some opportunities out there that are boding very well for us. Office buildings are challenged. I think that we're going to see particularly spec office buildings, especially of office buildings declining, coming up. Architectural Billing Index seems to support that new construction is going to be declining slightly. We've had four months in a row that architecture billing index has been below the benchmark of 50. So that puts more emphasis on us capitalizing on some of the markets that we're very strong in. And one of the things that I've noticed looking at the sales channel partners pipeline and talking to them, is that there are more and more opportunities that are owner-operated type facilities, which bodes very well for us. As opposed to speculative facilities or developer type facilities where they own them for a short period of time. So I guess the next part of our market segments that we've talked about in the past is lodging. We have multiple national accounts that we work with on that. And new starts on lodging, I think, are going to be very challenged. We've seen a couple of projects delayed. Haven't seen anything canceled, but I think that new starts are going to be challenging. But that gives us an opportunity to go through and help these people with their efforts to modernize, update and refresh some existing facilities, and we fit that very well. So with that, I'll conclude the market talk. Our backlog was $119.6 million at June 30. And and that was versus $166 million a year ago. Now to some that may look unfavorable, to me, it actually looks favorable because at $166 million our lead time was extraordinary and lengthy, and this was restricting us from some really good opportunities.</p><p>We had to turn down a lot of opportunities because we just weren't able to produce we worked very hard. And for about a year now, maybe in a little excess of a year. We've been adding seven any capacity, additional capacity and streamlining our operations. And so now we're able to produce at a higher level. And that in itself brought the backlog down. And so at this point in time, our balance between backlog, bookings and shipments is relatively in order. There were a handful of jobs that were delayed somewhat. It actually coincided well with the fact that we had some K-12 replacement business that we had units due in June and July primarily. And at the same time, we were having the absenteeism rate. So we were a little bit challenged by that. As it turns out, those projects were all delayed because they had absent rates for their construction workers that have delayed their progress as well as school opening delays. So we were actually able to satisfy all of those shipment requirements with no delay to the actual outcome. We're seeing orders as I said, in July, rebounding very nicely. And I think this is in response somewhat to our lead times. A lot of opportunities are being presented to us and one of the primary concerns has been, when can you deliver it? And we've been able to respond favorably to these. So that being the case, I think 2020, we will finish the year with modest growth. And I believe we'll begin 2021 with a relatively stable backlog unless something catastrophic occurs in the overall economy that we've not yet seen. July results were good. In spite of the fact that we had some absenteeism for the first few days of July.</p><p>As of I think it was July 12, was the first day that I saw us produce on a daily basis. At our highest level, and we've been able to maintain that production level. So in the first 10 or 11 days, of course, you had two days of holiday in there, but the first 10 or 11 days of the month were we're underperforming because of absenteeism. But once we hit around the 12th of July, we restored that. The balance of the year, barring any unexpected absenteeism again or anything catastrophic like that, we think that we're going to perform quite well for the rest of the year. One of the absenteeism issues that has been discussed and there's been a lot of effort in the community in our business itself to assist with how to resolve is there's schools that have not gone into session on time, not planning one session in time. And so you've got people that are having some child care issues with what do they do with their kids, while they're at work, I think they've become relatively well equipped on this now. It seems because they've been dealing with this since late in the spring. And so I don't think we're going to have too much substantial impact from that. Just a little bit of a lagging situation for a handful of people.</p><p>With that, I'd like to open it up to questions.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-64160">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-64160');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] Our first question comes from the line of Brent Thielman. Your line is open. Please ask your question.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Hello, Brent.</p><p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p><p>Hi, good afternoon guys. Gary, maybe first off, I mean that despite some of the disruption seemingly late in the quarter. The gross margins are holding up pretty well. I guess your thanks for the at least some view on what you think sales can do through the remainder of the year. And I know that's subject to a lot of things. But how do you feel about sort of maintaining these margins at these sort of levels in all the variant factors out there and barring any change in the inflationary environment?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Well, we had June we look at each month stand-alone as they occur. And June was surprisingly good. This absenteeism that PTO time for those people is accrued. And so it doesn't affect us in a negative way. The thing that you don't get is you don't get the dilution of the fixed cost when you don't have the revenue. So I think that I'm very proud of what our team did in managing cost and managing the people for the best outcome. June as a stand-alone month was relatively representative on a gross margin basis for the whole quarter, as I recall. I'm getting a nod of approval from my accounting and folks here. So June was relatively on par with that. We've not since we just closed out July, we've not seen those numbers. But revenue in July looked fairly similar to June. Yes. So having the same sort of controls in place on the efficiency and just the scrutiny to every little detail in the business. I would expect that July performed somewhat on par with June, maybe slightly less, but somewhat on par. August is starting off with really, really good production and good attendance. And so I think that August, and we've got good backlog to run through September at this rate and good prospects on the horizon. So I think that the stability in gross margin performance is very probable.</p><p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p><p>Okay. And Gary, just to clarify, I mean, I think typically, third quarter is one of your stronger quarters. Do you expect a step-up in revenue from the second quarter?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>I don't. And it's because those first roughly 10 days of July, 10, 11 days that we were below production numbers because of attendance. If that had not occurred, then yes, I would say so. If we were in the range, and I've not seen the forecast yet. We're just normally, about mid-quarter, my production team could give me a pretty good forecast of what revenue is going to look like because they've got their production schedule. Fairly solidified, and they've got their rhythm for it. So we're about a week early for being able to determine that. But I would expect Q3 probably to be in the same range as Q2. It won't be the normal bump up that you've seen historically. And again, that was largely affected by the absenteeism or this first 10 or 11 days of July. Do you both of you agree with that?</p><p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p><p>I would tend to say so. I think effectively, the impact we had from coronavirus was split half between the end of June and the beginning of July. And so you're going to probably see somewhat of a mirror image</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Yes. That's the way I saw it as well. Thank you, Scott.</p><p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p><p>Okay. And just to clarify, given the lead times have shortened, I see all the all the work in your backlog reflects most current pricing and that's out there, you don't have much. I have no one from prior price increases. Yes, yes.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>No, no. We had as I recall, it was relatively across the board price increase in June of 19. That's fully enabled in the production, I would say, even Q2 was fully enabled. There was a small price increase, selected price increase in December. Again, I think some part of Q2 captured that. And I would say that Q3 is entirely on that, but that was very inconsequential to the overall gain because it was on select equipment, even though it was 4% or 5%, it was on probably let's see, it was on is on long view equipment along five? Correct? Yes. So it was affected on somewhere around 20% of our revenue. That we we got about half with that price level on the plant floor.</p><p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p><p>Got it. Last one, I'll get back in clear. The indoor air quality upgrades, is that considered a part sale or is that a full-on replacement of a unit?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Full on replacement of the unit for most of these facilities. When you go let's see you go to an elementary school that was built even 15 years ago. And let's say they did not purchase a on equipment. So the equipment that they purchased, the fan that supplies the air to the space and recirculates it, doesn't have the capability of overcoming these additional filtration levels that we're talking about. The other thing is, is those units that a lot of our competitors sold on those projects don't have the space in them for these virus-killing devices. And so our units accommodate both and that strategy in our units has been available for many years. So we didn't have to do any new design, redesign or anything like that. We have a project that we are supplying to the Carrollton Farmers branch, Texas School district. I think there's nearly 600 units. And they are adding the virus killing device and then we added the higher filtration. And so that's just one example of a school district that recognize this and that was all planned before coronavirus. And they came in and added this virus killing device once they saw the effect of it with coronavirus.</p><p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p><p>Okay, thank you guys for taking the questions. I'll be back in line.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from the line of Joe Mondillo. Your line is now open. Please ask your question.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>Hey, Gary. Hi guys. I wanted to start with following up on Brent's last question. And just to expand on that. What kind of units are you referring to? Or is it water-source heat pumps or roof comps? And then in addition to that, is there other types of units that maybe you don't manufacture other types of systems that could be a substitute at all? And then lastly, as far as the uniqueness that you mentioned regarding the static pressure, could you expand on that? And how many producers out there can provide what you're referring to there?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Okay. So let's divide this up a little bit. So in indoor units, virtually every competitor we have has this capability because indoor units don't tend to be so commoditized, they're not an in stock on the shelf kind of a unit. they're built to order. So virtually everyone that's building indoor air handling units has the capability of providing a fan system that is capable of overcoming this. Indoor air handling units typically go with chill water systems. For the products that we produce in Longview, Texas, we have a high percentage of buyers that are what's called a split system. They also include a condensing unit, and they have refrigerant run through their coils rather than chilled water. So when you're talking about those indoor split systems, you start narrowing this down a little bit because a lot of our competitors don't have a real effective offering of this style of split system with these kind of capabilities. So for many years, our successes of the split systems we produce in Longview were due to the attributes they had with some application strategies. In other words, a lot of projects with chill water, which are typically your larger central projects, central plant projects, we were able to duplicate that kind of performance with a split system and scale that down. So some projects need an indoor air unit because they don't have rough structure or roof square footage available for a rooftop unit. So that lies well for long view. Now when we're talking about packaged rooftop units, when we're talking about units that are 25 tons and smaller, then virtually all of our competitors with a small exception that would be Daiken.</p><p>Their fan systems will not accommodate this additional static pressure for these higher filtration requirements. So we have essentially one competitor that can match us on fan performance on these 2510 and smaller units, and that would be Daikin. And when we look at it from a competitive standpoint, that's quite nice to compete against them. When we go above 25 tons, then it starts sprinkling in a few manufacturers here and there, between 25 and 50 tons, we'll say, that can do these sorts of things. Now once we get above 50 tons, then it becomes even more of those manufacturers are capable of doing that. So our most substantial opportunity is in the 2- through 25-ton sized equipment that our strategy and our value proposition are extraordinary. Water-source heat pumps. We do have a fan capability to step up the filtration capabilities in those. That was one of our Unite designs. Because we recognize this ability even before coronavirus, that there were many applications that would desire a higher level of filtration. So as far as water-source heat pump manufacturers going head-to-head, we do have unique capabilities once again in that facet.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>Okay. And have you I don't know which one would be maybe the most ideal fitted for sort of COVID air quality. If there is one, have you seen any I guess, just broadly, have you seen any indication that you've started to see increased demand? Or is it still too early?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>To the increased filtration or the virus-killing-devices going in the units.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>I guess, just anything related to putting in COVID-related systems because of air quality and filtration</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>I think we're on the early part of that, Joe. And let me tell you, Asra is our industry resource for research and development. And it's done on a all of our peers participate on these committees and on these research opportunities. And so this is a collaboration between the entire industry. And as Ray published a paper recently describing what they thought were best practices for how to handle this airborne virus, this aerosol virus and that was increased filtration levels. It's called a merv level in ERV, increased merve level filtration as well as coupling that with one of the three strategies for virus killing. So UV lights are an obvious choice for killing a virus. But the problem is, is that to have the intensity required to kill the virus at any speed as it goes through the unit and its normal speed, the intensity has to be much higher than what we were accustomed to having in the past. Most of the UV devices that the industry has been installing in their units was to kill any surface borne viruses and bacterias that might accumulate on the cooling coil. So this strategy of increasing the intensity of UV is rather new, and it's something that as Ray put in one of the recommendations. There's also some ionization type virus killing devices that are getting some attention as well as a plasma device that will kill this virus. So there's really three technologies out there that are working their way through to see which one is the most viable, which one is the best value. But you couple all of these with this higher level of filtration because when they kill that virus, you want to capture those particles in a throwaway filter.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>I see. Very interesting. How about as far as your COVID related end market trouble spots being retail, office, hotels, they make up 40% to 50% of your revenue. Construction is overall 50% or so of your revenue how do you view maybe the positive aspects of Co bid related demand to some of the adverse effects to the pandemic in terms of those end markets?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Well, I think what you've described is relatively accurate that some of these markets are declining. As far as new construction, they're definitely in jeopardy of declining because architecture billing index has been a great indicator, and it's four months in a row that it's been below the benchmark of 50 that says things are going in a positive direction. So there will be more emphasis on replacement business. It's something that when I came here nearly four years ago now, that I recognized was a significant market opportunity for us, and we've been putting strategies in place to increase that. And I think we're making good traction with that. Our sales channel as a whole, as we improved it, some of the characteristics of the improved partners that we selected were due to that aspect of their business that they had a focus on this aftermarket replacement solutions type business. So I think that a lot of the improvements we made in the sales channel is going to have a beneficial impact to us shifting from 50-50, 50% new construction, 50% replacement. I would look for over the next 18 months for our ratio to change somewhat and our new construction to be a smaller percentage and our replacement business to be a larger percentage. When it comes to water-source heat pumps, particularly, that is an absolute strategy that must be utilized because the new construction, some of the biggest markets for water-source heat pumps were hotels and high-rise condominiums.</p><p>Both of which I think are going to be substantially curtailed. But on the other hand, if they're not building new hotels and not build new condominiums, they've got units that have got age on that are failing that have got to be replaced. So we have have a full-time effort on increasing that business for about 18 months in the water-source heat pumps. And we've seen some configurations and equipment strategies that would make it even more make our product offering even more attractive, and we're deep into the design of these additional characteristics and features that are going to enhance that. We're looking for somewhere in Q1 to have a complete generation of equipment, water-source heat pump equipment introduced that will be specifically to address this replacement market be backwardly compatible. Then the other thing to offset some of these industries and segments that are going downwardly trending, there's some upwardly trending opportunities as well. Some of which I've talked about before in more vague terms that I can talk more specific now. Large-scale conditioned warehouses there are companies that have online ordering, online processing of ordering and home delivery that are building additional facilities across North America. We've been successful in securing one particular business of that was building six new facilities across North America.</p><p>And at this point in time, we've secured the order for four of those facilities. Each one of them is not as an individual that's not material to our business, but they're all incremental, and they're all beneficial. Then the other thing is, we've seen some on shoring or reestablishing of manufacturing here in North America. We have secured some of that work already, and we have some in our pipeline being developed. One of those projects is extraordinary. It's in the early stages of it, but it's one that we expect to be awarded within this month. And so hopefully, when we're having this call next quarter, we'll be able to tell more about that. But at this point in time, it's a little early. But there's a lot of opportunities out there to offset the downside. Now overall, the growth is going to be challenging. But I think that when you looked at some of our peers and the reporting that they've had, competitors and peers. We are gaining market share. Our value proposition is more appreciated now than ever. And I've always said, and this is something that Norman has validated for me is in these times of downturn, that's when we actually flourish because people have time to consider the value proposition, and we win that very often.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>Okay. I just wanted to also just follow-up on sort of the backlog and the effect to what that has. And you gave sort of an indication of what you're thinking for the third quarter. I'm just trying to think sort of further out than the third quarter. Did this sort of mishap or maybe not miss that, but the issues with your absences. Did that affect where your backlog is today, which is relatively pretty high, if you look back two years ago, it's about 20%, 25% higher than where it was two years ago, even though it's down year-over-year from here. To that extent, how much did this sort of effect going into the fourth quarter? Do you think, say, you get sort of maybe flat to modest growth in orders in the third quarter? I see a recovery starting in the fourth quarter in that sort of scenario?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>I think that's reasonable to assess it that way. When we look at the commentary we're having with our sales channel partners, the general tenor is that things are improving as things began to open back up. Things are beginning to move. A good many of them believe that there's adequate opportunities out there to kind of maintain our position, but then we keep getting presented with these unique opportunities. This large manufacturing opportunity that's being presented to us right now is very lead time sensitive. And because of our increased capacity, we are absolutely able to meet their scheduled requirements. And when the discussion with some of the other contenders for the project, they're all challenged by that. They're not willing to commit to this very aggressive schedule. So when I go back to the planning we did a couple of years ago, realizing that we didn't have as much production capacity as we need it. And we started getting things rearranged, cleaned up in the plant, reutilizing some space, better utilizing it, getting more Salvani machines in here. We have when we built our new laboratory, for instance, we had an existing laboratory here in Tulsa. We have two manufacturing buildings here. The West building is our biggest footprint building. The East building was our original manufacturing building, and we build our smaller tonnage units there. And but we also had our original laboratory in there. Well, once we got the new laboratory up and going, we demoed that space. Working with our manufacturing engineering group here in the office, we devised a whole new manufacturing line for one of our most popular products one of our products that caused us to go out to an exorbitant lead time last year, 35, 40 weeks lead time.</p><p>Well, we've been able to arrest that to around 16 weeks right now, but when we get this new manufacturing line up and going, we will be able to produce these large tonnage units, the ones that are more standard configuration at 150% greater rate than we do right now. And when we look at that, that means we'll be on a regular basis. So that opportunity with that new manufacturing line, which will come on board, they're telling me sometime in December. So I'm kind of counting on it to start Q1 have that capacity available. Well, there's opportunities out there for the style units. They run I think they run 55 tons to 140 tons. Is that right, or 55 on the small yes, 55 to 140. So these fit, these larger conditioned warehouses and some data center type battery cooling areas and things like that. They fit it very well. And so we're increasing our manufacturing capacity right there. And with that reduced lead time on that, so many of these projects are very, very sensitive to lead time. When these people start planning these data centers, when they pull the trigger, they want to be done yesterday. And so we're going to be able to respond to that even better than we are today.</p><p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p><p>One thing just to make sure that we're all understanding is our backlog is expected to potentially still decline in the sense that it's supposed to represent roughly about two months' worth of our production. And that historically has been we have found to be kind of an ideal range or we don't have any questions at this time.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>Okay, well thanks for taking my questions. I'll hop back in queue</p><p><strong>Operator</strong></p><p>[Operator Instructions] We have a follow-up question from the line of Joe Mondillo do. Your line is now open. Please ask your question.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>Hi Guys. If you don't mind, I just have a couple of follow-ups.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Sure, sure. Go ahead, Joe.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>So just as far as capacity right now, what size backlog just so we sort of have an idea, what size backlog could you increase to where your lead times don't get extended or it doesn't cap your revenue. I'm just wondering how much revenue can this business sort of handle at this point?</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Well, it's a moving target because we continue to add manufacturing capacity. The new building in Longview, for instance, we went from 234,000 square foot original facility down there. We're building 220,000 square feet, capacity coming online Q1 and and so we'll have more capacity for Longview. Right now, if I segment lung views backlog out there, they're at about 12 weeks right now. I think we believe yes. And that's a more backlog a more lead time-sensitive product group than what we produce here in Tulsa. Ideal down these five to six weeks. Well, rather than curtail the orders, I want to increase the manufacturing capacity. So that will come on January 1. And so the ideal backlog today for Longview would be substantially less than what it is. The ideal backlog for Longview starting January 1, is going to be about where it is right now, OK? So that's that moving target. Now Longview has traditionally been, what, 10%, 12% of our revenues, hopefully, 10% to 12%. So if the Tulsa products were to become stagnant, which they won't, but if they were, then long views we're expecting good growth opportunity out of Longview in 2021. We've got multiple programs that we're working on with software development to expedite the processing and billing materials generation so we can shorten lead times to utilize that manufacturing capacity. Then here in Tulsa, we still don't have all of our Salvagnini machines installed that we ordered for accretive capacity. We've got one machine right now that looks to be probably two weeks away from coming online. So that will be some incremental capacity growth. So to answer your question, today, with the capacity I have today, the ideal backlog looks somewhere between $90 million and $100 million. But I have increasing capacity coming Ali over the next few months. So that's going to be a moving target.</p><p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p><p>One of the things we're also working on is trying to make sure that we have capacity to deal with short lead time requests in a growing effort as we move forward.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>We've got to have headroom between demand and production capacity. If we don't have that headroom, then you begin to discourage these people because they call and say, "Hey, I need this unit in this lead time. And if you have to say no, they look for either an alternative solution or they just give up altogether. And so having additional manufacturing capacity to have that headroom for that peaking. So over the last two or three years, you've not seen the bell curve that had existed through most of the life of the company. I believe in 2021, that we're more likely to see that bell curve begin to reestablish itself. And by 2022, I think it will be firmly in place. That being that Q2, Q3 have higher revenue numbers than Q1, Q4.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>Got it. How about raw materials, about 12 to 18 months ago, your the spread between input prices and output prices, sort of squeeze your margins. And I believe that sort of started to reverse in the other direction. But now we're seeing copper is pretty high historically and some other raw materials have been rising. So where are we on price cost situation. I have a sheet that they give me from our purchasing group that has about 70% of all of our purchase materials. Rather, those are fixed I mean, finished goods, like compressors and motors or rather they're raw materials like copper or aluminum, steadied and stainless steel.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Overall, that's quite stable right now. We've had some things go down, some things go up. As a trend, it was down just a little bit year-to-date. And we were able to lock in some pricing protection on certain aspects of that for do you remember how long we were able to lock in that, Steve. I 12 2018. Yes. So in the 12 to 18-month range on some of these materials, we've been able to lock in a buy price. So if those things begin to go up, and I've got this locked in price, and I kind of like my chances with that. I think we've done quite well. So just to summarize that, Joe, I think right now, what I'm seeing and what I've been given for the next six month outlook on material pricing is it's no impact, positive or negative. It's neutral. And then as far as the SG&A, I think I may have missed it, but was that inflated? I thought I heard maybe Scott said there was a donation in the SG&A. Yes. You did, Joe. You did miss that. So on May 12, when the Board of Directors so graciously appointed me the CEO, that is the same-day that Norm was appointed Executive Chairman. And so that's a next step for both of us. And in honor of that, the Board voted for and granted a onetime contribution to the Winefred Montana independent school district, which is where Norm was born and raised. And I'm proud to say that norm, Scott, myself and Doug Wichman went there and presented that check in person to them for $1.25 million. So that was an SG&A expense in Q2. And if you look at that, what a roughly $0.025 a share on a pre-tax basis and a little bit under $0.02 a share on an after-tax basis. Yes. Okay. So even with our absenteeism, if you'll make an allowance for that contribution, we were pretty darn close to earnings expectations. And our SG&A would have been pretty much in line with what you had previously thought.</p><p>Yes. Yes, correct. Even with taking that out though, it's the SG&A is still up 14%. But I guess, profit yes. Profit sharing, don't forget my employees. We allocate 10% of our pre-tax earnings to profit sharing. We issued the check goes out Monday, give you that exact amount, 12 $56 million I don't know the exact number off the top of my head, have a much for to get it real quick. So it was 1,686, the first quarter, and I believe the number was $12 and $56. This is per employee, all employees with the exception of $1,276.19 per eligible employees. I was sort FY 2020 into to $0.45 per regular eworks. Yes. So that profit sharing is an SG&A expense, and it's our biggest variable. The two biggest variables in our SG&A expenses typically are warranty and profit sharing. And so warranty is down and profit sharing is up. And that's the way we want it to be. Same period last year, that amount was $1,091, OK? So that's a 25% increase, almost 27% increase over last year. So at this point in time this year, on a dollars per hour basis, give me that calculation. I was $2.45 per rate. That was for the quarter. For the quarter. Year-to-date, were 280 in it. I don't remember the exact amount. Yes. Yes. So for year-to-date, our employees have gotten $2.8 an hour year-to-date in profit sharing bonus. Here on SG&A, we like to see going up. Yes. No, for sure. That definitely makes sense.</p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p><p>Well, that's all the questions I had. I appreciate you taking the extra ones and good luck with the back half of the year.</p><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>With no further questions, I want to thank all of you for participating and listening today. We'll talk to you in November for our third quarter results. Have a nice day.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 62 minutes</strong></p><h2>Call participants:</h2><p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p><p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p><p><strong>Rebecca A. Thompson</strong> -- <em>Chief Accounting Officer and Treasurer</em></p><p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p><p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/aaon">More AAON analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than AAON, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAAON%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=c6e57e9d-54e0-43b7-94cb-e0a620b42f33">ten best stocks</a></strong> for investors to buy right now… and AAON, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAAON%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=c6e57e9d-54e0-43b7-94cb-e0a620b42f33" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAON. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAON. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-8000", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAON"], "primary_tickers_companies": ["AAON, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Aaon Inc (AAON) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 84, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-8000"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-8000", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAON"], "primary_tickers_companies": ["AAON, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Aaon Inc (AAON) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 84, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], AAON earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Aaon Inc</strong> <span class="ticker" data-id="202684">(<a href="https://www.fool.com/quote/nasdaq/aaon-inc/aaon/">NASDAQ:AAON</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">10:15 p.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the AAON, Inc. second quarter sales and earnings call. [Operator Instructions]</p>, <p>I would now like to hand the conference over to your first presenter, Mr. Gary Fields. The floor is yours. You may begin.</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Good afternoon. I'd like to begin by reading a forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control, that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q. So now I'd like to begin with telling you a little bit about our experience with coronavirus and how it's affected our business. First of all, and of utmost importance, is to thank our employees. We've been able to maintain continuous operations. As a result, we have been able to assist with many COVID-19 projects. We are this is vital to our business as an essential business and essential business supplier. I'm very proud of the effort that our employees have gone too to maintain safety in the plant. They are all wearing masks, social distancing. They're doing temperature scans on arrival and at any point in time throughout the day that they feel like that it's necessary. When they clock in, in the mornings or in the evenings, whichever at the beginning of their shift, they certify through a wellness reporting system in our clock in. So we did have some absenteeism because of coronavirus. In June, we had about the second week of June, we had a substantial decline in attendance. It bottomed out in mid-June was mostly restored in the second week of July. Very happy to say that we had very good results with our people returning to work healthy and this was a temporary impact for that period of time I described. And we are mostly recovered on attendance, and these people came back very healthy, ready to work.</p>, <p>Now I'd like to turn the call over to Scott Asbjornson, our Chief Financial Officer.</p>, <p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p>, <p>I'd like to begin by discussing the comparative results of the three months ended June 30, 2020, versus June 30, 2019. Net sales were up 5.2% to $125.6 million from $119.4 million. Net sales for the quarter are up due primarily to our increased sheet mill production from the additional cell vanina machines of replaced in operation as well as our price increases implemented in 2019. Our gross profit increased 26.2% to $38.1 million from $30.2 million. As a percentage of sales, gross profit was 30.4% in the quarter just ended compared to 25.3% in 2019. We continue to see overall raw material cost decrease. The company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs. Selling, general and administrative expenses increased 23.4% to $15.9 million from $12.9 million in 2019. Additionally, as a percentage of sales, SG&A increased to 12.7% of total sales in the quarter just ended from 10.8% in 2019. SG&A is up due to increases in profit-sharing, employee incentives, driven by increased earnings and largely to a $1.25 million contribution to Winefred mont in public schools on behalf of Norman Asbjornson in recognition for his transition from CEO to Executive Chairman. This equates to roughly $0.025 per share. Income from operations increased 28.4% to $22.2 million or 17.7% of sales from $17.3 million or 14.5% of sales in 2019. Our effective tax rate decreased to 20% from 22.7%. The company's estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 25.1%. Net income increased to $17.8 million or 14.2% of sales compared to $13.4 million or 11.2% of sales in 2019. Diluted earnings per share increased by 36% to $0.34 per share from $0.25 per share.</p>, <p>Diluted earnings per share were based on 52,750,000 shares versus 52,747,000 shares in the same period a year ago. Now for the comparative results of six months ended June 30, 2020 versus June 30, 2019. Net sales were up 12.8% to $263.1 million from $233.3 million net sales for the quarter are up due primarily to our increased cheap mobile production from the additional Salvini machines that were placed into operation. Our gross profit increased 45.7% and to $81.1 million from $55.6 million. As a percentage of sales, gross profit was 30.8% in the quarter just ended compared to 23.9% in 2019. And as already noted, we have experienced decreased material costs and improved overhead absorption. Selling, general and administrative expenses increased 17.2% and to $31.2 million from $26.6 million in 2019. Additionally, as a percentage of sales, SG&A increased to 11.8% of total sales in the quarter just ended from 11.4% in 2019. Income from operations increased 73.8% to $50 million or 19% of sales from $28.8 million or 12.3% of sales in 2019. Our effective tax rate decreased to 20.8% from 23.1%. The company's estimated annual 2020 effective tax rate excluding discrete events, is expected to be approximately 25.1%. And net income increased to $39.7 million or 15.1% of sales compared to $22.1 million or 9.5% of sales in 2019. The diluted earnings per share increased by 78.6% to $0.75 per share from $0.42 per share. Diluted earnings per share were based on 52,885,000 shares versus 52,589,000 shares in the same period a year ago.</p>, <p>At this time, I would like to turn the call over to Rebecca Thompson, Chief Accounting Officer and Treasury.</p>, <p><strong>Rebecca A. Thompson</strong> -- <em>Chief Accounting Officer and Treasurer</em></p>, <p>Thank you, Scott. Looking with the balance sheet, you'll see that we had a working capital balance of $143.2 million versus $131.5 million at December 31, 2019. Unrestricted cash totaled $61.3 million at June 30, 2020. Our current ratio is approximately 2.9:1. Our capital expenditures were $33.5 million. We expect capital expenditures for the year to be approximately $73.2 million. The company had stock repurchases of $15.9 million during the six months ended June 30, 2020. Shareholders' equity per diluted share is $6.1 at June 30, 2020, compared to $5.51 at December 31, 2019.</p>, <p>I'd now like to turn the call back over to our CEO and President, Gary Fields Field.</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>So net sales have increased. This is due, by and large, as Scott mentioned earlier, to the Salvagnini machines that allowed us to produce the sheet metal required to build our units. So once we produce the sheet metal, then it becomes more impacted by human activity. So absent of the time frame through June and the first week or two of July, we have been producing on a daily basis at a record pace, the highest production numbers per day. So once absenteeism is stabilized, which has begun to do quite well. We're nearly restored on that. So we believe that our production has also stabilized. Of course, this coronavirus is such a quick thing that can impact you. I suppose it could occur again. But we've done pretty well with that so the projects that we have produced in relation to coronavirus, we've talked about last quarter, some of those for New York. There's also been some other facilities that we produced equipment for that, for instance, in the state of Maine, there's a company up there that manufactures the swabs that are used for testing. They've expanded their facility substantially. We've already supplied quite a few units to them for their first expansion. And I think we're closing in on an order for another expansion that they have planned. They were very happy with what we did on the first one. So that's kind of the the jobs that are directly related. There's been a lot of indirect relationship in that there's been some community hospitals that have come out of mothballs that we've been able to provide some equipment to help renovate and update these.</p>, <p>There's been a myriad of facilities that are as a result of coronavirus, there was an awareness on the need to get these facilities up and going. The other thing we're seeing good activity on, and we're very well positioned with our equipment for is increased vigilance on indoor air quality. The coronavirus is well-known to be a aerosol transmitted virus and so if you have the ability to do two things: one is capture that so that it's not recirculated. And two is if you have the ability to kill that virus inside the unit. And so we have strategies that have assisted with that with higher levels of filtration and different methods utilized. There's been two or three methods utilized to help reduce the live virus that's circulated. We're fairly unique in that regard in that our basic design of our the air side of our equipment has additional static pressure capabilities to overcome the static pressure requirements of these higher filtration levels that ash Ray has recommended. So this, again, positions us very well. Mentioned before that absenteeism had an impact on production. We've restored that now. So we're producing again at daily numbers that are on par with the best daily numbers we've ever achieved. Sales coming in the door, bookings we saw a decline throughout the spring and the early summer versus our expectations and versus 2019. However, July turned around substantially. We finished July's bookings substantially above 2019 and more in alignment with our expectations prior to coronavirus. We've also looked at activities that are in the pipeline with our sales channel partners and believe that we're poised for fairly solid results going through the next period of time here. At least for another quarter or two as far as bookings. I think with the political environment, election and so forth, that there could be some debate on how well that's going to occur in Q4, Q1. And I think that a lot of states that opened up early on and got some activities going seen a little pause in opening and some have even contracted a bit. So these are things that are very unpredictable.</p>, <p>So it's very hard to give a solid direction that things are going, but our backlog remains very stable, very strong. And it's nearing our ideal point so that our lead times are nearing their ideal point as well. Water-source heat pumps, there's not been a whole lot of change in that business. We saw a little weaker demand it for so far this year than what we did in 2019. But we've began with some strategies to strengthen that in primarily in the aftermarket replacement business, looking at what makes a more effective presentation of product for that. And we're in the midst of designing some additional product that's more ideal for that backwardly compatible replacement market, such that if somebody has a failure that they don't want to repair the unit, you've got an instant change out for them. So that's some of our redesign that we've done in that regard our legacy products, as I would like to term them the products that we build in Longview Tex is the products that we build here in Telsa prior to this water-source heat pump. Under constant development for improvement. We've got a multitude of strategies and improvements that are rolling out on a weekly to monthly basis. And we believe that each one of these is going to have a positive impact on our growth potential and our market share growth. So at this point in time, we've seen everything relatively in line with past relationships as far as size of units and so forth. But I would like to point out that there's a couple of opportunities that we've been able to capture. And I think there's more on the horizon. And that is that there's some conditioned warehouses. These are warehouses that require air conditioning. They tend to be very large buildings that they utilize larger units. So you don't have a large quantity of units, you have larger tonnage. And this falls very well into our offerings. Some of our competitors are very limited on the size range they have. And so this has been able to provide us a really good opportunity. Some of those orders are already in-house. We have some more in the pipeline that are very, very significant.</p>, <p>But manufacturing is the same time. We've seen some acceleration in manufacturing project opportunities, some of which we've capitalized on. I mentioned once before that we were awarded the contract to supply the air conditioning equipment for the new Black & Decker Craftsman tools manufacturing in North Texas. We have other manufacturing facilities, some of which are we don't want to talk about individual projects so much when they're in the pipeline, but there are some opportunities out there that are boding very well for us. Office buildings are challenged. I think that we're going to see particularly spec office buildings, especially of office buildings declining, coming up. Architectural Billing Index seems to support that new construction is going to be declining slightly. We've had four months in a row that architecture billing index has been below the benchmark of 50. So that puts more emphasis on us capitalizing on some of the markets that we're very strong in. And one of the things that I've noticed looking at the sales channel partners pipeline and talking to them, is that there are more and more opportunities that are owner-operated type facilities, which bodes very well for us. As opposed to speculative facilities or developer type facilities where they own them for a short period of time. So I guess the next part of our market segments that we've talked about in the past is lodging. We have multiple national accounts that we work with on that. And new starts on lodging, I think, are going to be very challenged. We've seen a couple of projects delayed. Haven't seen anything canceled, but I think that new starts are going to be challenging. But that gives us an opportunity to go through and help these people with their efforts to modernize, update and refresh some existing facilities, and we fit that very well. So with that, I'll conclude the market talk. Our backlog was $119.6 million at June 30. And and that was versus $166 million a year ago. Now to some that may look unfavorable, to me, it actually looks favorable because at $166 million our lead time was extraordinary and lengthy, and this was restricting us from some really good opportunities.</p>, <p>We had to turn down a lot of opportunities because we just weren't able to produce we worked very hard. And for about a year now, maybe in a little excess of a year. We've been adding seven any capacity, additional capacity and streamlining our operations. And so now we're able to produce at a higher level. And that in itself brought the backlog down. And so at this point in time, our balance between backlog, bookings and shipments is relatively in order. There were a handful of jobs that were delayed somewhat. It actually coincided well with the fact that we had some K-12 replacement business that we had units due in June and July primarily. And at the same time, we were having the absenteeism rate. So we were a little bit challenged by that. As it turns out, those projects were all delayed because they had absent rates for their construction workers that have delayed their progress as well as school opening delays. So we were actually able to satisfy all of those shipment requirements with no delay to the actual outcome. We're seeing orders as I said, in July, rebounding very nicely. And I think this is in response somewhat to our lead times. A lot of opportunities are being presented to us and one of the primary concerns has been, when can you deliver it? And we've been able to respond favorably to these. So that being the case, I think 2020, we will finish the year with modest growth. And I believe we'll begin 2021 with a relatively stable backlog unless something catastrophic occurs in the overall economy that we've not yet seen. July results were good. In spite of the fact that we had some absenteeism for the first few days of July.</p>, <p>As of I think it was July 12, was the first day that I saw us produce on a daily basis. At our highest level, and we've been able to maintain that production level. So in the first 10 or 11 days, of course, you had two days of holiday in there, but the first 10 or 11 days of the month were we're underperforming because of absenteeism. But once we hit around the 12th of July, we restored that. The balance of the year, barring any unexpected absenteeism again or anything catastrophic like that, we think that we're going to perform quite well for the rest of the year. One of the absenteeism issues that has been discussed and there's been a lot of effort in the community in our business itself to assist with how to resolve is there's schools that have not gone into session on time, not planning one session in time. And so you've got people that are having some child care issues with what do they do with their kids, while they're at work, I think they've become relatively well equipped on this now. It seems because they've been dealing with this since late in the spring. And so I don't think we're going to have too much substantial impact from that. Just a little bit of a lagging situation for a handful of people.</p>, <p>With that, I'd like to open it up to questions.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-64160">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-64160');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Our first question comes from the line of Brent Thielman. Your line is open. Please ask your question.</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Hello, Brent.</p>, <p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p>, <p>Hi, good afternoon guys. Gary, maybe first off, I mean that despite some of the disruption seemingly late in the quarter. The gross margins are holding up pretty well. I guess your thanks for the at least some view on what you think sales can do through the remainder of the year. And I know that's subject to a lot of things. But how do you feel about sort of maintaining these margins at these sort of levels in all the variant factors out there and barring any change in the inflationary environment?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Well, we had June we look at each month stand-alone as they occur. And June was surprisingly good. This absenteeism that PTO time for those people is accrued. And so it doesn't affect us in a negative way. The thing that you don't get is you don't get the dilution of the fixed cost when you don't have the revenue. So I think that I'm very proud of what our team did in managing cost and managing the people for the best outcome. June as a stand-alone month was relatively representative on a gross margin basis for the whole quarter, as I recall. I'm getting a nod of approval from my accounting and folks here. So June was relatively on par with that. We've not since we just closed out July, we've not seen those numbers. But revenue in July looked fairly similar to June. Yes. So having the same sort of controls in place on the efficiency and just the scrutiny to every little detail in the business. I would expect that July performed somewhat on par with June, maybe slightly less, but somewhat on par. August is starting off with really, really good production and good attendance. And so I think that August, and we've got good backlog to run through September at this rate and good prospects on the horizon. So I think that the stability in gross margin performance is very probable.</p>, <p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p>, <p>Okay. And Gary, just to clarify, I mean, I think typically, third quarter is one of your stronger quarters. Do you expect a step-up in revenue from the second quarter?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>I don't. And it's because those first roughly 10 days of July, 10, 11 days that we were below production numbers because of attendance. If that had not occurred, then yes, I would say so. If we were in the range, and I've not seen the forecast yet. We're just normally, about mid-quarter, my production team could give me a pretty good forecast of what revenue is going to look like because they've got their production schedule. Fairly solidified, and they've got their rhythm for it. So we're about a week early for being able to determine that. But I would expect Q3 probably to be in the same range as Q2. It won't be the normal bump up that you've seen historically. And again, that was largely affected by the absenteeism or this first 10 or 11 days of July. Do you both of you agree with that?</p>, <p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p>, <p>I would tend to say so. I think effectively, the impact we had from coronavirus was split half between the end of June and the beginning of July. And so you're going to probably see somewhat of a mirror image</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Yes. That's the way I saw it as well. Thank you, Scott.</p>, <p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p>, <p>Okay. And just to clarify, given the lead times have shortened, I see all the all the work in your backlog reflects most current pricing and that's out there, you don't have much. I have no one from prior price increases. Yes, yes.</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>No, no. We had as I recall, it was relatively across the board price increase in June of 19. That's fully enabled in the production, I would say, even Q2 was fully enabled. There was a small price increase, selected price increase in December. Again, I think some part of Q2 captured that. And I would say that Q3 is entirely on that, but that was very inconsequential to the overall gain because it was on select equipment, even though it was 4% or 5%, it was on probably let's see, it was on is on long view equipment along five? Correct? Yes. So it was affected on somewhere around 20% of our revenue. That we we got about half with that price level on the plant floor.</p>, <p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p>, <p>Got it. Last one, I'll get back in clear. The indoor air quality upgrades, is that considered a part sale or is that a full-on replacement of a unit?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Full on replacement of the unit for most of these facilities. When you go let's see you go to an elementary school that was built even 15 years ago. And let's say they did not purchase a on equipment. So the equipment that they purchased, the fan that supplies the air to the space and recirculates it, doesn't have the capability of overcoming these additional filtration levels that we're talking about. The other thing is, is those units that a lot of our competitors sold on those projects don't have the space in them for these virus-killing devices. And so our units accommodate both and that strategy in our units has been available for many years. So we didn't have to do any new design, redesign or anything like that. We have a project that we are supplying to the Carrollton Farmers branch, Texas School district. I think there's nearly 600 units. And they are adding the virus killing device and then we added the higher filtration. And so that's just one example of a school district that recognize this and that was all planned before coronavirus. And they came in and added this virus killing device once they saw the effect of it with coronavirus.</p>, <p><strong>Brent Thielman</strong> -- <em>D.A. Davidson -- Analyst</em></p>, <p>Okay, thank you guys for taking the questions. I'll be back in line.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Our next question comes from the line of Joe Mondillo. Your line is now open. Please ask your question.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>Hey, Gary. Hi guys. I wanted to start with following up on Brent's last question. And just to expand on that. What kind of units are you referring to? Or is it water-source heat pumps or roof comps? And then in addition to that, is there other types of units that maybe you don't manufacture other types of systems that could be a substitute at all? And then lastly, as far as the uniqueness that you mentioned regarding the static pressure, could you expand on that? And how many producers out there can provide what you're referring to there?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Okay. So let's divide this up a little bit. So in indoor units, virtually every competitor we have has this capability because indoor units don't tend to be so commoditized, they're not an in stock on the shelf kind of a unit. they're built to order. So virtually everyone that's building indoor air handling units has the capability of providing a fan system that is capable of overcoming this. Indoor air handling units typically go with chill water systems. For the products that we produce in Longview, Texas, we have a high percentage of buyers that are what's called a split system. They also include a condensing unit, and they have refrigerant run through their coils rather than chilled water. So when you're talking about those indoor split systems, you start narrowing this down a little bit because a lot of our competitors don't have a real effective offering of this style of split system with these kind of capabilities. So for many years, our successes of the split systems we produce in Longview were due to the attributes they had with some application strategies. In other words, a lot of projects with chill water, which are typically your larger central projects, central plant projects, we were able to duplicate that kind of performance with a split system and scale that down. So some projects need an indoor air unit because they don't have rough structure or roof square footage available for a rooftop unit. So that lies well for long view. Now when we're talking about packaged rooftop units, when we're talking about units that are 25 tons and smaller, then virtually all of our competitors with a small exception that would be Daiken.</p>, <p>Their fan systems will not accommodate this additional static pressure for these higher filtration requirements. So we have essentially one competitor that can match us on fan performance on these 2510 and smaller units, and that would be Daikin. And when we look at it from a competitive standpoint, that's quite nice to compete against them. When we go above 25 tons, then it starts sprinkling in a few manufacturers here and there, between 25 and 50 tons, we'll say, that can do these sorts of things. Now once we get above 50 tons, then it becomes even more of those manufacturers are capable of doing that. So our most substantial opportunity is in the 2- through 25-ton sized equipment that our strategy and our value proposition are extraordinary. Water-source heat pumps. We do have a fan capability to step up the filtration capabilities in those. That was one of our Unite designs. Because we recognize this ability even before coronavirus, that there were many applications that would desire a higher level of filtration. So as far as water-source heat pump manufacturers going head-to-head, we do have unique capabilities once again in that facet.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>Okay. And have you I don't know which one would be maybe the most ideal fitted for sort of COVID air quality. If there is one, have you seen any I guess, just broadly, have you seen any indication that you've started to see increased demand? Or is it still too early?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>To the increased filtration or the virus-killing-devices going in the units.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>I guess, just anything related to putting in COVID-related systems because of air quality and filtration</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>I think we're on the early part of that, Joe. And let me tell you, Asra is our industry resource for research and development. And it's done on a all of our peers participate on these committees and on these research opportunities. And so this is a collaboration between the entire industry. And as Ray published a paper recently describing what they thought were best practices for how to handle this airborne virus, this aerosol virus and that was increased filtration levels. It's called a merv level in ERV, increased merve level filtration as well as coupling that with one of the three strategies for virus killing. So UV lights are an obvious choice for killing a virus. But the problem is, is that to have the intensity required to kill the virus at any speed as it goes through the unit and its normal speed, the intensity has to be much higher than what we were accustomed to having in the past. Most of the UV devices that the industry has been installing in their units was to kill any surface borne viruses and bacterias that might accumulate on the cooling coil. So this strategy of increasing the intensity of UV is rather new, and it's something that as Ray put in one of the recommendations. There's also some ionization type virus killing devices that are getting some attention as well as a plasma device that will kill this virus. So there's really three technologies out there that are working their way through to see which one is the most viable, which one is the best value. But you couple all of these with this higher level of filtration because when they kill that virus, you want to capture those particles in a throwaway filter.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>I see. Very interesting. How about as far as your COVID related end market trouble spots being retail, office, hotels, they make up 40% to 50% of your revenue. Construction is overall 50% or so of your revenue how do you view maybe the positive aspects of Co bid related demand to some of the adverse effects to the pandemic in terms of those end markets?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Well, I think what you've described is relatively accurate that some of these markets are declining. As far as new construction, they're definitely in jeopardy of declining because architecture billing index has been a great indicator, and it's four months in a row that it's been below the benchmark of 50 that says things are going in a positive direction. So there will be more emphasis on replacement business. It's something that when I came here nearly four years ago now, that I recognized was a significant market opportunity for us, and we've been putting strategies in place to increase that. And I think we're making good traction with that. Our sales channel as a whole, as we improved it, some of the characteristics of the improved partners that we selected were due to that aspect of their business that they had a focus on this aftermarket replacement solutions type business. So I think that a lot of the improvements we made in the sales channel is going to have a beneficial impact to us shifting from 50-50, 50% new construction, 50% replacement. I would look for over the next 18 months for our ratio to change somewhat and our new construction to be a smaller percentage and our replacement business to be a larger percentage. When it comes to water-source heat pumps, particularly, that is an absolute strategy that must be utilized because the new construction, some of the biggest markets for water-source heat pumps were hotels and high-rise condominiums.</p>, <p>Both of which I think are going to be substantially curtailed. But on the other hand, if they're not building new hotels and not build new condominiums, they've got units that have got age on that are failing that have got to be replaced. So we have have a full-time effort on increasing that business for about 18 months in the water-source heat pumps. And we've seen some configurations and equipment strategies that would make it even more make our product offering even more attractive, and we're deep into the design of these additional characteristics and features that are going to enhance that. We're looking for somewhere in Q1 to have a complete generation of equipment, water-source heat pump equipment introduced that will be specifically to address this replacement market be backwardly compatible. Then the other thing to offset some of these industries and segments that are going downwardly trending, there's some upwardly trending opportunities as well. Some of which I've talked about before in more vague terms that I can talk more specific now. Large-scale conditioned warehouses there are companies that have online ordering, online processing of ordering and home delivery that are building additional facilities across North America. We've been successful in securing one particular business of that was building six new facilities across North America.</p>, <p>And at this point in time, we've secured the order for four of those facilities. Each one of them is not as an individual that's not material to our business, but they're all incremental, and they're all beneficial. Then the other thing is, we've seen some on shoring or reestablishing of manufacturing here in North America. We have secured some of that work already, and we have some in our pipeline being developed. One of those projects is extraordinary. It's in the early stages of it, but it's one that we expect to be awarded within this month. And so hopefully, when we're having this call next quarter, we'll be able to tell more about that. But at this point in time, it's a little early. But there's a lot of opportunities out there to offset the downside. Now overall, the growth is going to be challenging. But I think that when you looked at some of our peers and the reporting that they've had, competitors and peers. We are gaining market share. Our value proposition is more appreciated now than ever. And I've always said, and this is something that Norman has validated for me is in these times of downturn, that's when we actually flourish because people have time to consider the value proposition, and we win that very often.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>Okay. I just wanted to also just follow-up on sort of the backlog and the effect to what that has. And you gave sort of an indication of what you're thinking for the third quarter. I'm just trying to think sort of further out than the third quarter. Did this sort of mishap or maybe not miss that, but the issues with your absences. Did that affect where your backlog is today, which is relatively pretty high, if you look back two years ago, it's about 20%, 25% higher than where it was two years ago, even though it's down year-over-year from here. To that extent, how much did this sort of effect going into the fourth quarter? Do you think, say, you get sort of maybe flat to modest growth in orders in the third quarter? I see a recovery starting in the fourth quarter in that sort of scenario?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>I think that's reasonable to assess it that way. When we look at the commentary we're having with our sales channel partners, the general tenor is that things are improving as things began to open back up. Things are beginning to move. A good many of them believe that there's adequate opportunities out there to kind of maintain our position, but then we keep getting presented with these unique opportunities. This large manufacturing opportunity that's being presented to us right now is very lead time sensitive. And because of our increased capacity, we are absolutely able to meet their scheduled requirements. And when the discussion with some of the other contenders for the project, they're all challenged by that. They're not willing to commit to this very aggressive schedule. So when I go back to the planning we did a couple of years ago, realizing that we didn't have as much production capacity as we need it. And we started getting things rearranged, cleaned up in the plant, reutilizing some space, better utilizing it, getting more Salvani machines in here. We have when we built our new laboratory, for instance, we had an existing laboratory here in Tulsa. We have two manufacturing buildings here. The West building is our biggest footprint building. The East building was our original manufacturing building, and we build our smaller tonnage units there. And but we also had our original laboratory in there. Well, once we got the new laboratory up and going, we demoed that space. Working with our manufacturing engineering group here in the office, we devised a whole new manufacturing line for one of our most popular products one of our products that caused us to go out to an exorbitant lead time last year, 35, 40 weeks lead time.</p>, <p>Well, we've been able to arrest that to around 16 weeks right now, but when we get this new manufacturing line up and going, we will be able to produce these large tonnage units, the ones that are more standard configuration at 150% greater rate than we do right now. And when we look at that, that means we'll be on a regular basis. So that opportunity with that new manufacturing line, which will come on board, they're telling me sometime in December. So I'm kind of counting on it to start Q1 have that capacity available. Well, there's opportunities out there for the style units. They run I think they run 55 tons to 140 tons. Is that right, or 55 on the small yes, 55 to 140. So these fit, these larger conditioned warehouses and some data center type battery cooling areas and things like that. They fit it very well. And so we're increasing our manufacturing capacity right there. And with that reduced lead time on that, so many of these projects are very, very sensitive to lead time. When these people start planning these data centers, when they pull the trigger, they want to be done yesterday. And so we're going to be able to respond to that even better than we are today.</p>, <p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p>, <p>One thing just to make sure that we're all understanding is our backlog is expected to potentially still decline in the sense that it's supposed to represent roughly about two months' worth of our production. And that historically has been we have found to be kind of an ideal range or we don't have any questions at this time.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>Okay, well thanks for taking my questions. I'll hop back in queue</p>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] We have a follow-up question from the line of Joe Mondillo do. Your line is now open. Please ask your question.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>Hi Guys. If you don't mind, I just have a couple of follow-ups.</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Sure, sure. Go ahead, Joe.</p>, <p><strong>Joe Mondillo</strong> -- <em>Sidoti -- Analyst</em></p>, <p>So just as far as capacity right now, what size backlog just so we sort of have an idea, what size backlog could you increase to where your lead times don't get extended or it doesn't cap your revenue. I'm just wondering how much revenue can this business sort of handle at this point?</p>, <p><strong>Gary D. Fields</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Well, it's a moving target because we continue to add manufacturing capacity. The new building in Longview, for instance, we went from 234,000 square foot original facility down there. We're building 220,000 square feet, capacity coming online Q1 and and so we'll have more capacity for Longview. Right now, if I segment lung views backlog out there, they're at about 12 weeks right now. I think we believe yes. And that's a more backlog a more lead time-sensitive product group than what we produce here in Tulsa. Ideal down these five to six weeks. Well, rather than curtail the orders, I want to increase the manufacturing capacity. So that will come on January 1. And so the ideal backlog today for Longview would be substantially less than what it is. The ideal backlog for Longview starting January 1, is going to be about where it is right now, OK? So that's that moving target. Now Longview has traditionally been, what, 10%, 12% of our revenues, hopefully, 10% to 12%. So if the Tulsa products were to become stagnant, which they won't, but if they were, then long views we're expecting good growth opportunity out of Longview in 2021. We've got multiple programs that we're working on with software development to expedite the processing and billing materials generation so we can shorten lead times to utilize that manufacturing capacity. Then here in Tulsa, we still don't have all of our Salvagnini machines installed that we ordered for accretive capacity. We've got one machine right now that looks to be probably two weeks away from coming online. So that will be some incremental capacity growth. So to answer your question, today, with the capacity I have today, the ideal backlog looks somewhere between $90 million and $100 million. But I have increasing capacity coming Ali over the next few months. So that's going to be a moving target.</p>, <p><strong>Scott M. Asbjornson</strong> -- <em>Vice President of Finance and Chief Financial Officer</em></p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAON. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-8000", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAON"], "primary_tickers_companies": ["AAON, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Aaon Inc (AAON) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 84, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-8000"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-8000", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAON"], "primary_tickers_companies": ["AAON, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Aaon Inc (AAON) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 84, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | AAON earnings call for the period ending June 30, 2020. | I would now like to hand the conference over to your first presenter, Mr. Gary Fields. The floor is yours. You may begin.\n Good afternoon. I'd like to begin by reading a forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control, that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q. So now I'd like to begin with telling you a little bit about our experience with coronavirus and how it's affected our business. First of all, and of utmost importance, is to thank our employees. We've been able to maintain continuous operations. As a result, we have been able to assist with many COVID-19 projects. We are this is vital to our business as an essential business and essential business supplier. I'm very proud of the effort that our employees have gone too to maintain safety in the plant. They are all wearing masks, social distancing. They're doing temperature scans on arrival and at any point in time throughout the day that they feel like that it's necessary. When they clock in, in the mornings or in the evenings, whichever at the beginning of their shift, they certify through a wellness reporting system in our clock in. So we did have some absenteeism because of coronavirus. In June, we had about the second week of June, we had a substantial decline in attendance. It bottomed out in mid-June was mostly restored in the second week of July. Very happy to say that we had very good results with our people returning to work healthy and this was a temporary impact for that period of time I described. And we are mostly recovered on attendance, and these people came back very healthy, ready to work.\n Now I'd like to turn the call over to Scott Asbjornson, our Chief Financial Officer.\n I'd like to begin by discussing the comparative results of the three months ended June 30, 2020, versus June 30, 2019. Net sales were up 5.2% to $125.6 million from $119.4 million. Net sales for the quarter are up due primarily to our increased sheet mill production from the additional cell vanina machines of replaced in operation as well as our price increases implemented in 2019. Our gross profit increased 26.2% to $38.1 million from $30.2 million. As a percentage of sales, gross profit was 30.4% in the quarter just ended compared to 25.3% in 2019. We continue to see overall raw material cost decrease. The company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs. Selling, general and administrative expenses increased 23.4% to $15.9 million from $12.9 million in 2019. Additionally, as a percentage of sales, SG&A increased to 12.7% of total sales in the quarter just ended from 10.8% in 2019. SG&A is up due to increases in profit-sharing, employee incentives, driven by increased earnings and largely to a $1.25 million contribution to Winefred mont in public schools on behalf of Norman Asbjornson in recognition for his transition from CEO to Executive Chairman. This equates to roughly $0.025 per share. Income from operations increased 28.4% to $22.2 million or 17.7% of sales from $17.3 million or 14.5% of sales in 2019. Our effective tax rate decreased to 20% from 22.7%. The company's estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 25.1%. Net income increased to $17.8 million or 14.2% of sales compared to $13.4 million or 11.2% of sales in 2019. Diluted earnings per share increased by 36% to $0.34 per share from $0.25 per share.\n Diluted earnings per share were based on 52,750,000 shares versus 52,747,000 shares in the same period a year ago. Now for the comparative results of six months ended June 30, 2020 versus June 30, 2019. Net sales were up 12.8% to $263.1 million from $233.3 million net sales for the quarter are up due primarily to our increased cheap mobile production from the additional Salvini machines that were placed into operation. Our gross profit increased 45.7% and to $81.1 million from $55.6 million. As a percentage of sales, gross profit was 30.8% in the quarter just ended compared to 23.9% in 2019. And as already noted, we have experienced decreased material costs and improved overhead absorption. Selling, general and administrative expenses increased 17.2% and to $31.2 million from $26.6 million in 2019. Additionally, as a percentage of sales, SG&A increased to 11.8% of total sales in the quarter just ended from 11.4% in 2019. Income from operations increased 73.8% to $50 million or 19% of sales from $28.8 million or 12.3% of sales in 2019. Our effective tax rate decreased to 20.8% from 23.1%. The company's estimated annual 2020 effective tax rate excluding discrete events, is expected to be approximately 25.1%. And net income increased to $39.7 million or 15.1% of sales compared to $22.1 million or 9.5% of sales in 2019. The diluted earnings per share increased by 78.6% to $0.75 per share from $0.42 per share. Diluted earnings per share were based on 52,885,000 shares versus 52,589,000 shares in the same period a year ago.\n At this time, I would like to turn the call over to Rebecca Thompson, Chief Accounting Officer and Treasury.\n Thank you, Scott. Looking with the balance sheet, you'll see that we had a working capital balance of $143.2 million versus $131.5 million at December 31, 2019. Unrestricted cash totaled $61.3 million at June 30, 2020. Our current ratio is approximately 2.9:1. Our capital expenditures were $33.5 million. We expect capital expenditures for the year to be approximately $73.2 million. The company had stock repurchases of $15.9 million during the six months ended June 30, 2020. Shareholders' equity per diluted share is $6.1 at June 30, 2020, compared to $5.51 at December 31, 2019.\n I'd now like to turn the call back over to our CEO and President, Gary Fields Field.\n So net sales have increased. This is due, by and large, as Scott mentioned earlier, to the Salvagnini machines that allowed us to produce the sheet metal required to build our units. So once we produce the sheet metal, then it becomes more impacted by human activity. So absent of the time frame through June and the first week or two of July, we have been producing on a daily basis at a record pace, the highest production numbers per day. So once absenteeism is stabilized, which has begun to do quite well. We're nearly restored on that. So we believe that our production has also stabilized. Of course, this coronavirus is such a quick thing that can impact you. I suppose it could occur again. But we've done pretty well with that so the projects that we have produced in relation to coronavirus, we've talked about last quarter, some of those for New York. There's also been some other facilities that we produced equipment for that, for instance, in the state of Maine, there's a company up there that manufactures the swabs that are used for testing. They've expanded their facility substantially. We've already supplied quite a few units to them for their first expansion. And I think we're closing in on an order for another expansion that they have planned. They were very happy with what we did on the first one. So that's kind of the the jobs that are directly related. There's been a lot of indirect relationship in that there's been some community hospitals that have come out of mothballs that we've been able to provide some equipment to help renovate and update these.\n There's been a myriad of facilities that are as a result of coronavirus, there was an awareness on the need to get these facilities up and going. The other thing we're seeing good activity on, and we're very well positioned with our equipment for is increased vigilance on indoor air quality. The coronavirus is well-known to be a aerosol transmitted virus and so if you have the ability to do two things: one is capture that so that it's not recirculated. And two is if you have the ability to kill that virus inside the unit. And so we have strategies that have assisted with that with higher levels of filtration and different methods utilized. There's been two or three methods utilized to help reduce the live virus that's circulated. We're fairly unique in that regard in that our basic design of our the air side of our equipment has additional static pressure capabilities to overcome the static pressure requirements of these higher filtration levels that ash Ray has recommended. So this, again, positions us very well. Mentioned before that absenteeism had an impact on production. We've restored that now. So we're producing again at daily numbers that are on par with the best daily numbers we've ever achieved. Sales coming in the door, bookings we saw a decline throughout the spring and the early summer versus our expectations and versus 2019. However, July turned around substantially. We finished July's bookings substantially above 2019 and more in alignment with our expectations prior to coronavirus. We've also looked at activities that are in the pipeline with our sales channel partners and believe that we're poised for fairly solid results going through the next period of time here. At least for another quarter or two as far as bookings. I think with the political environment, election and so forth, that there could be some debate on how well that's going to occur in Q4, Q1. And I think that a lot of states that opened up early on and got some activities going seen a little pause in opening and some have even contracted a bit. So these are things that are very unpredictable.\n So it's very hard to give a solid direction that things are going, but our backlog remains very stable, very strong. And it's nearing our ideal point so that our lead times are nearing their ideal point as well. Water-source heat pumps, there's not been a whole lot of change in that business. We saw a little weaker demand it for so far this year than what we did in 2019. But we've began with some strategies to strengthen that in primarily in the aftermarket replacement business, looking at what makes a more effective presentation of product for that. And we're in the midst of designing some additional product that's more ideal for that backwardly compatible replacement market, such that if somebody has a failure that they don't want to repair the unit, you've got an instant change out for them. So that's some of our redesign that we've done in that regard our legacy products, as I would like to term them the products that we build in Longview Tex is the products that we build here in Telsa prior to this water-source heat pump. Under constant development for improvement. We've got a multitude of strategies and improvements that are rolling out on a weekly to monthly basis. And we believe that each one of these is going to have a positive impact on our growth potential and our market share growth. So at this point in time, we've seen everything relatively in line with past relationships as far as size of units and so forth. But I would like to point out that there's a couple of opportunities that we've been able to capture. And I think there's more on the horizon. And that is that there's some conditioned warehouses. These are warehouses that require air conditioning. They tend to be very large buildings that they utilize larger units. So you don't have a large quantity of units, you have larger tonnage. And this falls very well into our offerings. Some of our competitors are very limited on the size range they have. And so this has been able to provide us a really good opportunity. Some of those orders are already in-house. We have some more in the pipeline that are very, very significant.\n But manufacturing is the same time. We've seen some acceleration in manufacturing project opportunities, some of which we've capitalized on. I mentioned once before that we were awarded the contract to supply the air conditioning equipment for the new Black & Decker Craftsman tools manufacturing in North Texas. We have other manufacturing facilities, some of which are we don't want to talk about individual projects so much when they're in the pipeline, but there are some opportunities out there that are boding very well for us. Office buildings are challenged. I think that we're going to see particularly spec office buildings, especially of office buildings declining, coming up. Architectural Billing Index seems to support that new construction is going to be declining slightly. We've had four months in a row that architecture billing index has been below the benchmark of 50. So that puts more emphasis on us capitalizing on some of the markets that we're very strong in. And one of the things that I've noticed looking at the sales channel partners pipeline and talking to them, is that there are more and more opportunities that are owner-operated type facilities, which bodes very well for us. As opposed to speculative facilities or developer type facilities where they own them for a short period of time. So I guess the next part of our market segments that we've talked about in the past is lodging. We have multiple national accounts that we work with on that. And new starts on lodging, I think, are going to be very challenged. We've seen a couple of projects delayed. Haven't seen anything canceled, but I think that new starts are going to be challenging. But that gives us an opportunity to go through and help these people with their efforts to modernize, update and refresh some existing facilities, and we fit that very well. So with that, I'll conclude the market talk. Our backlog was $119.6 million at June 30. And and that was versus $166 million a year ago. Now to some that may look unfavorable, to me, it actually looks favorable because at $166 million our lead time was extraordinary and lengthy, and this was restricting us from some really good opportunities.\n We had to turn down a lot of opportunities because we just weren't able to produce we worked very hard. And for about a year now, maybe in a little excess of a year. We've been adding seven any capacity, additional capacity and streamlining our operations. And so now we're able to produce at a higher level. And that in itself brought the backlog down. And so at this point in time, our balance between backlog, bookings and shipments is relatively in order. There were a handful of jobs that were delayed somewhat. It actually coincided well with the fact that we had some K-12 replacement business that we had units due in June and July primarily. And at the same time, we were having the absenteeism rate. So we were a little bit challenged by that. As it turns out, those projects were all delayed because they had absent rates for their construction workers that have delayed their progress as well as school opening delays. So we were actually able to satisfy all of those shipment requirements with no delay to the actual outcome. We're seeing orders as I said, in July, rebounding very nicely. And I think this is in response somewhat to our lead times. A lot of opportunities are being presented to us and one of the primary concerns has been, when can you deliver it? And we've been able to respond favorably to these. So that being the case, I think 2020, we will finish the year with modest growth. And I believe we'll begin 2021 with a relatively stable backlog unless something catastrophic occurs in the overall economy that we've not yet seen. July results were good. In spite of the fact that we had some absenteeism for the first few days of July.\n As of I think it was July 12, was the first day that I saw us produce on a daily basis. At our highest level, and we've been able to maintain that production level. So in the first 10 or 11 days, of course, you had two days of holiday in there, but the first 10 or 11 days of the month were we're underperforming because of absenteeism. But once we hit around the 12th of July, we restored that. The balance of the year, barring any unexpected absenteeism again or anything catastrophic like that, we think that we're going to perform quite well for the rest of the year. One of the absenteeism issues that has been discussed and there's been a lot of effort in the community in our business itself to assist with how to resolve is there's schools that have not gone into session on time, not planning one session in time. And so you've got people that are having some child care issues with what do they do with their kids, while they're at work, I think they've become relatively well equipped on this now. It seems because they've been dealing with this since late in the spring. And so I don't think we're going to have too much substantial impact from that. Just a little bit of a lagging situation for a handful of people.\n With that, I'd like to open it up to questions.\n | Aaon Inc | (NASDAQ:AAON) | Aug 7, 2020 | 10:15 p.m. ET | 10 | pm | 2020-08-07 | 2020-08-10 | 2020-08-07 | 2020-08-11 | NASDAQ | As such, it is subject to the occurrence of many events outside AAON's control, that could cause AAON's results to differ materially from those anticipated. | As such, it is subject to the occurrence of many events outside AAON's control, that could cause AAON's results to differ materially from those anticipated. | [0.04624366 0.89805436 0.05570204] | negative | -0.851811 | 2020-08-11 | 58.799999 | 60.220001 | 57.924999 | 59.450001 | 189730.0 | 60.000000 | 60.959999 | 59.799999 | 60.020000 | 229070.0 | Building | 2020-06-30 | 2020-06-30 | 0.34 | 0.371280 | 2020-06-30 | AAON | -0.031280 | miss | 1.220001 | increase | 1 | positive |
| 2 | AAWW | /earnings/call-transcripts/2020/08/07/atlas-air-worldwide-holdings-inc-aaww-q2-2020-earn.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Atlas Air Worldwide Holdings Inc</strong> <span class="ticker" data-id="209494">(<a href="https://www.fool.com/quote/nasdaq/atlas-air-worldwide-holdings-inc/aaww/">NASDAQ:AAWW</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">11:00 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Earnings Call for Atlas Air worldwide. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]</p><p>I would now like to hand the conference over to your speaker today, Atlas Air Worldwide. Thank you. Please go ahead.</p><p><strong>Edward J. McGarvey</strong> -- <em>Vice President, Treasure</em></p><p>Thank you, Rob, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2020 results conference call. Today's call will be hosted by John Dietrich, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at atlasairworldwide.com under presentations in the Investor Information section. As indicated on slide two, we'd like to remind you that our discussion about the company's performance today include some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements.</p><p>For information about risk factors related to our business, please refer to our 2019 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release, and in the appendix that is attached to today's slides. During our question-and-answer period today, we'd like to ask participants to limit themselves to one principal question and one follow-up question. So that we can accommodate as many participants as possible. After we have gone through the queue, we'll be happy to answer any additional questions as time permits.</p><p>At this point, I'd like to draw your attention to slide three and turn the call to John Dietrich.</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Thanks, Ed, and hello, everyone. Welcome to our second quarter earnings call. Clearly, the world has changed in ways none of us could have ever imagined just a few short months ago. It's hard breaking to see so many people so adversely impacted by COVID-19. We're all grateful to those working on the front lines in this coronavirus fight including all the healthcare workers treating the patients, the doctors and scientists working in the labs to bring an effective vaccine to market as soon as possible and so many others who are contribute to relief efforts. We at Atlas feel a tremendous sense of pride, purpose and responsibility in the essential role we're playing in the global supply chain. The goods we carry quite literally help save lives. They are also fueling the economy and supporting jobs. The entire Atlas team has stepped up and delivered high-quality service for our customers despite the many challenges presented by this pandemic, including a variety of travel restrictions, testing protocols, quarantine mandates and other operational challenges. I couldn't be more proud of all our employees and the work they're doing, particularly our crew and ground staff out in the field. I'd like to thank them all for their extraordinary efforts. I'd also like to take this opportunity to acknowledge and thank the U.S. government for all the support provided to our industry as we continue to manage through the regulatory and operational issues created by COVID-19.</p><p>At Atlas, safety is and will continue to be our top priority, and we're taking every precaution to safeguard all our employees. We also appreciate our customers and vendors' commitment to safety and their partnership in Unity as we protect not only our employees, but our operations as well. Now I'd like to turn to the business in our second quarter results on slide four. Atlas Air worldwide had an exceptional quarter as revenue and earnings continue to exceed our expectations. These positive results were primarily driven by the team, capitalizing on strong demand and higher yields in our commercial Charter and South America businesses and we also continue to provide the U.S. military with essential services, and our ACMI customers flew well above their minimum guarantees. As many of you know, we operate the world's largest fleet of 747 freighters along with large fleets of 777, 767s and 737s that play a key role in our customers' operating networks. Our fleet and our service offerings are unmatched in this industry. To serve the increased demand we're seeing, we quickly reactivated three of our 747-400 converted freighters and operationalized the 777 freighter from our dry leasing business.</p><p>This enabled us to serve the strong and profitable shorter-term demand, while also entering into numerous new long-term charter programs at attractive yields. We expanded our long-term charter business to include new agreements with manufacturers such as HP, Inc. and large freight forwarders like DHL Global Forwarding, Apex Logistics, DB Shanker, Flexport and Geodis, all that wanted to secure committed capacity from us. In addition, our second quarter results benefited from the CMI aircraft we added to our fleet in 2019, including five incremental 737s for Amazon, two incremental 777s for DHL and two incremental 747 to four hundreds for Nippon Cargo Airlines. And we also placed an existing 747-400 in CMI service with LL earlier this year. The quarter also benefited from lower aircraft rent and depreciation, lower fuel prices and an expected refund of excess aircraft rent paid in prior periods. These benefits were partially offset by higher maintenance expense related to additional engine overhauls and other maintenance we performed to take advantage of attractive vendor pricing discounts and slot availability in the current environment.</p><p>We also experienced lower AMC passenger demand as the U.S. military took precautionary measures to limit nonessential travel, lower 747 Dreamlifter flying due to Boeing slowdown of its 787 Dreamliner production and higher crew costs related to the 10% pay increase we provided to our pilots effective May 1, pending the completion of our joint collective barring agreement and premium pay, we're providing for our pilots for operating into certain areas outside of the U.S. that have been significantly impacted by COVID-19. During the second quarter, we executed on very favorable business opportunities in a challenging operating environment with the safety of our employees is our top priority. We continue to leverage the scale of our world-class fleet the scope of our global operations and the flexibility of our business model to capitalize on the current favorable market dynamics. As we take advantage of opportunities to grow our business, we're also mindful of the importance of disciplined financial management, particularly in the evolving and uncertain environment. In that regard, we've taken a number of steps, including significantly reducing nonessential employee travel, limiting ground staff hiring in the use of contractors and tightening spending in virtually every area of the business. We also remain focused on ensuring that our resources are allocated to opportunities that generate the best returns. With that in mind, we've decided to exit certain older unprofitable 737 to 400 aircraft.</p><p>And we've renegotiated other customer agreements to drive enhanced profitability as we committed to do. We're also taking actions to increase our liquidity and further strengthen our financial position. This includes the sale of certain nonessential assets and our participation in the Cares Act payroll support program for air cargo carriers that we announced in June. As indicated on slide five, we're reintroducing our full year 2020 outlook. Reflecting our first half results and our current expectations for the balance of the year and subject to any material COVID-19 developments, we expect to fly more than 330,000 block hours this year, with about 70% of those in the ACMI segment and the remainder in Charter. We anticipate full year 2020 revenue of just over $3 billion and adjusted EBITDA of approximately $750 million. Our outlook also anticipates approximately 50% of our full year 2020 adjusted net income to occur in the second half of the year. That would result in our 2020 adjusted net income being more than double that of 2019. As many of you know, we've historically generated the vast majority of our earnings in the second half of the year. This year, however, and due to the strength of the first half, we anticipate our full year 2020 adjusted net income to be more evenly split between the first and second half of the year.</p><p>Maintenance expense for the year is expected to total approximately $480 million, with depreciation and amortization totaling about $255 million and core capital expenditures, which exclude aircraft and engine purchases, are projected to total approximately $80 million to $90 million, mainly for parts and components for our fleet. We also expect our full year 2020 adjusted effective income tax rate to be approximately 23%. Looking at the third quarter, we've seen commercial charter yields moderate from the second quarter, but they still remain elevated and very attractive compared with typical yields for this time of year. We anticipate that our adjusted net income for the third quarter will represent approximately 20% of our full year results. This will be more than six times higher than adjusted net income of $9.5 million in the third quarter of 2019. We also expect to fly more than 85,000 block hours in the third quarter with revenue of nearly $800 million and adjusted EBITDA of about $170 million. So this will be a good time for me to ask Spencer to provide a review of our second quarter 2020 results.</p><p>So Spencer, over to you. And after which, I'll be happy to take your questions.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Thank you, John, and hello, everyone. Our strong second quarter results are highlighted on slide six. On an adjusted basis, EBITDA totaled $247 million with adjusted net income of $123.2 million. On a reported basis, net income was $78.9 million. Our adjusted earnings in the second quarter included an effective income tax rate of 21.6%. Moving to the top of slide seven. Operating revenue totaled $825.3 million in the second quarter. ACMI revenue during the quarter primarily reflected lower block hours driven by the redeployment of 747-400 aircraft to charter to support the numerous new long-term charter programs that John noted. Partially offset by an increase in 777, 737 and 747-400 CMI flying. Higher Charter revenue was primarily driven by increased flying and a higher average rate per block hour. Block hour volume growth primarily reflected strong demand for freighter aircraft, driven by the disruption of global supply chains, the reduction of available cargo capacity in the market, the redeployment of 747-400 aircraft from ACMI and a 777 freighter from dry leasing and our ability to increase utilization. And dry leasing revenue, primarily related to changes in leases and the disposition of certain nonessential aircraft during the first quarter of this year.</p><p>Looking now at the bottom of the slide, segment contribution totaled $210.2 million in the second quarter. ACMI earnings primarily reflected increases in CMI flying and a reduction in aircraft rent and depreciation expense. These benefits were offset by the redeployment of 747-400 aircraft to charter, higher heavy maintenance expense including additional engine overhauls to take advantage of availability and pricing discounts and higher pilot costs, including the 10% pay increase and the premium pay for operating in certain areas. Higher charter contribution was also driven by the increase in commercial cargo yields and demand for freighter aircraft. Charter contribution also benefited from lower aircraft rent and depreciation and the redeployment of aircraft from ACMI and dry leasing. These benefits were partially offset by lower passenger demand from the U.S. military and the higher heavy maintenance expense and pilot costs. In dry leasing, lower contribution was primarily due to changes in leases and the disposition of certain nonessential aircraft during the first quarter. Now turning to slide eight. As the slide shows, our net leverage ratio improved significantly during the second quarter, decreasing from 4.4 times at the end of the first quarter to 3.0 times at the end of the second quarter.</p><p>And we expect further improvement as the year progresses as we benefit from increased EBITDAR levels, a strong cash balance and maintaining debt payments of approximately $70 million per quarter. We ended the second quarter with cash, including cash equivalents, restricted cash and short-term investments totaling $739.2 million compared with $113.4 million at the end of 2019. Our improved cash balance at June 30 primarily reflected strong cash provided by operating activities and also include the funds we received through the payroll support program. Net cash provided by financing activities primarily reflected proceeds from debt issuance and from our revolving credit facility partially offset by payments on debt obligations. Net cash used for investing activities primarily related to core capital expenditures and spare engines and upgrade kits partially offset by proceeds from the disposal of certain nonessential aircraft and engines. As a reminder, our debt has a low weighted average coupon rate, which now stands at 3%, and the vast majority is secured by our aircraft assets, which have a value well in excess of the related debt. We remain committed to a strong balance sheet. And as John outlined earlier, we are taking actions to mitigate the impact of any continuation or worsening of the pandemic. By reducing costs, enhancing liquidity and strategically allocating resources.</p><p>Now I'd like to turn it back to John.</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you, Spencer. And moving to slide nine. As I mentioned earlier, Q2 was an exceptional quarter for Atlas Air worldwide, and we have a very favorable outlook for the remainder of 2020. Atlas will continue to play an essential role in the global supply chain. And we're taking every precaution to keep our employees safe and ensure that we continue to transport the goods, the world needs during these challenging times. With an exceptionally talented team of employees, a strong balance sheet, of fleet and operating capabilities that are unmatched in our industry will continue to deliver safe and high-quality service for our customers and strong results for you, our investors.</p><p>So with that, operator, I'd like to turn it over to you take our first question. Thank you.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-89535">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-89535');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] And your first question comes from the line of David Ross from Stifel. Your line is open.</p><p><strong>David Griffith Ross</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>Yes, thank you very much and Yes. I wanted to first talk about the longer-term Charter business that you mentioned, the opportunity here with a strong yield environment to lock up some of these transactional customers for a little bit longer than a quick transaction. Do any of these extend after 2020? Or is this kind of good to go to take us through year-end? And then who knows after that?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Yes. Thank you, David. And the answer is yes, they do extend beyond 2020. The characterization of long-term reflects that from our perspective. And the way we're looking at them is they're very much ACMI like while taking advantage of the current market dynamics and the yields that the market is gaining right now. So yes, well through 2020.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Yes. Dave, if I could just add, some of these agreements, several of these agreements go into the second half of 2022. Several of them are late in 2021. So their longer-term charter arrangements, they are much more ACMI like in nature. And I've talked about before the blurring between ACMI and charter that has started to happen in our business. And these new long-term charter arrangements sort of further that. So you can think of this as sort of medium shorter-term ACMI or medium or longer-term charter, if you want to think of it that way.</p><p><strong>David Griffith Ross</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>Okay. So that's helpful. It's really a long-term contract, not just long-term for charter, kind of like a long weekend. Or something along those lines. These are years. Yes. And John, you mentioned in the comments that the South America businesses were particularly strong in South America business what was driving that? Can you comment a little bit more about the regional strength?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>I think it was a combination of a number of factors. Of course, the reduction in overall capacity in the market was a contributor. We're a strong player with the large wide-body aircraft we have in that market to begin with. So when you take the reduced capacity along with the schedule reliability that we have and the connectivity of our network, all those factors contributed to really strong yields for us and strong demand.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>And Dave, we have relationships with all the big forwarders there and the big charter movers. And Atlas is one of, if not the top mover into and out of the Miami airport from South America. So that relationship and that commitment to that region is really helpful.</p><p><strong>David Griffith Ross</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>And then last question, just on the pilots. You saw the or you had the 10% pay increase go into effect in the last quarter, which I'm sure was well received. Has there been any improvement in the negotiations or talks with the union since the pay increase went into effect? And any comments around service levels? Have they also seen any improvement?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Yes, David, I think we've seen a lot of changes over the last number of months in the pilot situation. We did offer and the union accepted the 10% pay increase, we work closely with the union leadership to enter into a, what's called a memorandum of understanding an MOU to provide premium pay for those flying into some of the international hotspots with COVID. That's gone a long way to help the operation and our crew members make a little more money in the company to continue operating. All that, coupled with the negotiations that now have a defined path forward in the merger we've talked about earlier, the courts have weighed in, the arbitrators have weighed in and the clock is now ticking on the nine months of bargaining. That started in May of this year, and the parties are continued to negotiate in bargain. So we've seen a lot of forward progress as well as a tremendous effort from our crew members at a time where the world needs them the most, and that's now through this pandemic. So it's been a great operation, and our customers are happy and our pilots have the opportunity to take advantage and enjoy some of the benefits with the pay increase in the premium pay.</p><p><strong>Operator</strong></p><p>Your next question comes from the line of Bob Labick from CJS Securities. Your line is open.</p><p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p><p>Congratulations on just outstanding operating performance. I wanted to start, can you maybe talk a little bit about the direct contribution, distribution between ACMI and charter in the quarter. And obviously, ACMI contribution was lower, I would assume, related to the heavy maintenance and timing of maintenance. How should that factor into the back half of the year for ACMI? And how should we think about direct contribution? Because they just swung so wild this quarter as long as a little guidance there?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Yes. Sure, Bob. It's spencer. Yes, in ACMI, we had higher heavy maintenance, especially incremental engine overhauls and other repairs. We have given what's happening with some of the passenger airlines, we have opportunities to take advantage of open windows for performing maintenance. So there's slot availability. In addition to that, we are being offered discounts that we can take advantage of. And so we're performing maintenance at lower costs. And so we're saving quite a bit on that. So we've accelerated some maintenance that perhaps would have been performed later this year or especially maintenance into next year. So we've accelerated some of that to take advantage of this. And then that has an impact. We allocate those costs based on block hours. And so 70% of that gets allocated to ACMI. And so anyway, that has an impact certainly on those results. There's maintenance in 2021, as I said, that we're going to move into this year. Some we already did in the second quarter, I just mentioned, but some later this year. And so that will impact that contribution. If you were to back out the incremental maintenance, if you were to back out the crew premium pay that we are paying, and you were to back out the 10% increase, you'd see an ACMI margin in the second quarter that was higher than the second quarter of last year. So that's something to think about. If you think about sort of a normalized run rate.</p><p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p><p>Got it. Okay. That's great. And then obviously, you've discussed a little last call a little bit more today, the long-term Charter contracts. Have they impacted this quarter in particular? Or is this really more for the kind of back half and going out through partially 2022, as you mentioned? And how does that decision made to call it a Charter contract versus an ACMI contract? What actually does distinguish it now?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Yes. Good question. So the contracts, there are a good number of them, which is great. And we're entering into those. It's great for the customer. It gives them the capacity that they are looking for at less than current market really high yields. It's great for us because they're generally higher than a typical ACMI rate and the term, as we talked about, is longer. So it's kind of a win-win for the customer and for the company. To your question about what's the difference between ACMI and Charter, as I said, it's starting to get [blurrier], but in charter, the customer generally pays on a per trip basis, an all-in rate, which includes fuel. In ACMI, customer typically pays for fuel on its own and pays us on a block hour basis, not a per trip basis. So the differences are getting really slight, but those are the primary ones.</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Yes. I think also, there are a lot of other ancillary services in the charter side that are not necessarily included in the ACMI product that can be on a kind of a line item basis. And I'll just touch on the fuel that Spencer mentioned. While fuel is included, there are also protections in our agreements for wild swings in fuel, if should that happen, and it's indexed to account for significant swings that could occur over longer periods of time.</p><p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p><p>Got it. Okay. Great. And last one for me, if I could. Just as it relates to the obviously strong environment, can you talk about ACMI renewals, assuming you're still doing some of those as well. You're shifting, obviously, some to long term charter. But as ACMI contracts come up, how is that renewal process for you? And has it been playing out directionally?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Yes. Thanks, Bob. We feel really good about that. It's a good market to be in cargo right now. And I think those ACMI customers that we do have are very pleased that they have them on a long-term basis. I think prospective customers and existing customers who may be thinking about more aircraft, I think it's an attractive proposition for them to fix their rates and do so on a market competitive basis. Generally speaking, the Charter rates are a little bit higher. So it's a way for them to secure their costs and take advantage of the market. So we're excited about the future prospects of both the ACMI and the long-term charter arrangements for that reason.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>And Bob, I'll just add, Spencer, John talked about earlier, the sort of flexible nature of our business or the resiliency of our business. And one of the great benefits that our company has is to we have ACMI, we have shorter-term charter. We have longer-term charter. We have dry leasing, and we can move aircraft between all of those to take best advantage of each of those marketplaces and to serve each of those customers.</p><p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p><p>Got it. Sounds great. Thank you very much.</p><p><strong>Operator</strong></p><p>Your next question comes from the line of Helane Becker from Cowen. Your line is open.</p><p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p><p>I just have a couple of questions. On the 747s that you brought back, were you did you write those off last year accelerate depreciation? And do you have to reverse that at some point this year?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Sure. Good question, Helane. No, we temporarily park them. So we continue to depreciate them and bringing them back was a really easy decision. It was very inexpensive to bring them back. They needed just a tiny amount of maintenance. We quickly performed that and got them back going. So not much of an impact on the business overall. And then we've been really able to use them quite well, especially during the second quarter for sure. And then we expect to continue using them at least through the end of this year.</p><p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p><p>Okay. That's very helpful. And my other question actually is on the 737-400s that John referred to as you're getting out of them. And I saw that there was a southern aircraft in modification, I guess, in China being modified, I guess, the aircraft and 800 said, operated by Southern. So I guess the assumption is that southern is going to use the 737-800. Is there going to be a write-off associated with the 400s? Or are you parking those? What are you doing with those planes?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>So the 737-400, Helane, you may recall, in a prior earnings call, we talked about reviewing all of our operations and phasing out those that were unprofitable. This was one of them. And so we don't and southern did not own those aircraft. They were third-party aircraft, so they were CMI. So they'll go back to the customer. In the 737-800s, you're talking about, yes, Southern has a few more 737-800 coming, and we look forward to bringing them online.</p><p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p><p>Okay. Are those CMI are you owning those?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Those will be CMI.</p><p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p><p>Okay. That's very helpful. And then if I could just sneak one more question in about the peak. How are you thinking about the peak this year? I mean, you're seeing such demand right now. And I know, Spencer, you and I talked about that a couple of months ago, the demand you're seeing and so on, you're doing a lot of charters, blah, blah, blah. But what are you thinking about the peak? I mean, is this sustainable all year long?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Well, we feel really good about the peak. I do. And I absolutely think it's sustainable this year. As we're seeing in the media and in the industry, the expectations of passenger belly capacity to come back into the market have slowed dramatically. They will eventually come back. But with the, call it, resurgence or continuation of COVID, that's not happening as quickly as I think many hoped. That plays well for our business, frankly. And that, coupled with a lot of the secured agreements we already have in place that we do for the peak season. A lot of those deals are already fixed. As well as the demand we're seeing just generally and not just PPE, but both PPE and general manufactured goods, that we have capacity still to sell. And we believe the yields will continue to be very strong for the weeks and months to come and certainly through peak.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>And Helane, it's spencer. I'll just add just a little bit to that is that we expect that peak will be strong for general cargo like consumer products, and we think it will be strong for e-commerce and express shipments, for sure. For all the reasons that John talked about. Another indicator for the airfreight peak demand, obviously, we're out talking to our customers all the time. They expect the same. But another indicator ocean carriers are currently enjoying a good peak, and that's usually a pretty good indicator. For us and what our customers expect. Based on what we're hearing and we're seeing, we really don't expect things to get back to the way they used to be from a capacity standpoint overall, certainly well into 2021, if at all.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Your next question comes from Scott Group from Wolfe Research. Your line is open.</p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p>So I just want to follow-up on the long-term short-term charter stuff. So can you just directionally tell us how much of the commercial charter now is long-term charter and then can you just directionally talk about where these rates are relative to a year ago? And can you just clarify, are these new long-term charter rates? Are they locked in through next year? Are the rates still variable?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>So the rates are locked in. And as Spencer said, these deals are very ACMI like. I'll caveat that and say the fuel piece of it, there are adjusters if fuel swings heavily in one direction or the other. But other than that, they're locked in. And they're locked in for the longer period of time. So again, I would think of it in terms of ACM I like. In terms of percentage of the total charter business, I don't know, Spencer, if you have a percentage number, but you see from my prepared remarks, there are a number of new deals, five or six new customers in that regard. So you're looking at least an aircraft per customer there. So it's sizable.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Yes. And Scott, I would just add from a sort of percentage standpoint, about 70% block hours that we fly approximately are in ACMI. And so approximately 30% that are in charter. And then of charter, typically, half of that is flying for the U.S. military, and that leaves the other half for commercial charter. And then of that other half for commercial charter, so approximately 15% of our total block hours. About 1/3 of that is flying we do around South America, where rates have been very, very good over a number of years, and we have fixed block space agreements with a number of leading forwarders. And then about another 1/3 of the block hours is for these more programmatic charters, the longer-term charters that we have at fixed rates, as John said, index for fuel. And then that leaves the other sort of 1/3 of that or about 5% of our total block hours are allocated more toward the ad hoc charters, and those are out there in the spot market. Enjoying the rates that are out there in the marketplace.</p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p>And then directionally, those long-term charter rates that you're talking about, how much are those rates out? We can see how much the short-term Charter rates are up. I just don't know how to think about the long-term Charter rates.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Well, they're very customer-specific, and we don't want to talk about customer specifics on an open call. But we can certainly say that they are consistent with what the overall supply demand environment is like they're consistent with a very, very strong transcontinental air freight market and demand for wide-body international aircraft that we operate. So they're attractive rates.</p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p>Okay. And then just lastly, Spencer, for you, how much 2021 maintenance will pull forward into this year? And then when I look at the fourth quarter guidance, or the implied fourth quarter guidance, it's sort of flat year-over-year relative to just massive earnings growth in second and third quarter. Maybe just some thoughts on why that would be.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Sure. Both really good questions, Scott. Let's start with maintenance. So for 2021, typically, we don't provide an estimate of we typically wouldn't provide an estimate for 2021 heavy maintenance cost until we're in the beginning of 2021. But as we've talked about moving this forward, we want to provide a little bit more so we expect 2021 heavy maintenance costs to be around $60 million lower than 2020. And we previously expected 2021 to be a very heavy year in terms of engine overhaul and airframe check requirements. And as we've talked about, we had an opportunity to accelerate some of the engine inductions into this year into 2020 to take advantage of the slot availability and the opportunities for vendor pricing discounts. So those actions should bring 2021 heavy maintenance costs closer to a sort of normal run rate, although it still may be somewhat higher than 2018/2019 average. And then Scott, you had another good question about the fourth quarter. So the fourth quarter of this year compared to the fourth quarter of last year, a couple of a few big things to kind of point out there. With regard to volumes and yields, we should see tremendous advantages in the fourth quarter of this year versus last year, especially when it comes to those volumes and yields. The fourth quarter of this year will have higher heavy maintenance costs as we have six incremental engine overhauls, CF-680 engine overhauls, as I just talked about. The fourth quarter of last year had a refund of excess rent that will be greater than the amount this year. We also, this year, have the crew pay increase, the crew premium pay and military reductions flying volume reductions of military flying. And then offsetting that a little bit is we also have cost reductions throughout the company. So factoring all those things together because of the higher heavy maintenance and the prior year refund of excess rent, if you were to strip that out from last year. Then you'd really see the benefit of the yields and the volumes that we're going to enjoy this fourth quarter.</p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p>Okay, thank you guys.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Thanks, Scott.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Your next question comes from the line of Christopher Stathoulopoulos from Susquehanna. Your line is open.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>Okay. Spencer, just want to sure I heard what you said to in response to Scott's question, that 5% of your block hour book is tied to the spot market?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Approximately. We're just giving rough approximations of how the block hours break out. Yes.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>Okay. So I'm guessing with the move to these more hybrid, Charter and ACMI contracts, that there's been some concession with respect to pricing. Discount to what we're seeing in some of the rates like the tack index. Do you think that those rates are competitive enough where some of the players or marginal players in the market, let's say, Delta or Alaska have been getting into this market to backfill the lost main deck load factors. Do you think that where you've set these rates, there's an opportunity here to derive share to as or some of the more natural players in this market?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Sure, Chris. So the rates, as we talked about for these long-term charter arrangements are they're very attractive rates. As far as we think business is certainly being driven to Atlas, and you can see the number of contracts that we've entered into. They're great contracts over a good period of time. As far as talking about other carriers, I don't really think that's our place to talk about that. As far as the passenger, especially the U.S. operators, they were operating passenger planes as freighters. And that really helped them keep their pilots current. It helped them generate some business because the passenger business was down so much. But when yields are really escalated like they were in April and May, perhaps that makes more sense. And when the government as essentially the U.S. government is helping to pay for employee costs, and those airlines can take advantage of those things. But as yields have come down and if the government funding may or may not be there going forward, that's a decision, obviously, they have to make and really isn't our place to comment on.</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Yes, I'd like to weigh in on that a little bit as well, Chris. It's a total value proposition between the assets and the service offering that we bring to some of our long-term charter customers. The passenger carriers and using the passenger aircraft for freight, for example, there's a price point at which it makes sense for them and not, but I would not say it's a comparable product. They're not capable of handling the main deck freight, the loading and unloading is inefficient. But in a high demand environment, there is business for them to do that. And if they can cover their variable costs and get some contribution, they'll do that. But we think of the type of customers we've laid out here is looking for the total value proposition and the capability that we bring from a schedule standpoint, from a loading standpoint, from a distribution standpoint. So that garners a rate, and I would argue, a premium rate and taking advantage of the market that we're in, as spencer notified. So I think to for that reason, and if you look to some of the durations of these contracts and speaking to an earlier question, I think Helane asked about the duration. These are longer-term contracts, and these are sophisticated buyers who are taking a position and committing to capacity for this long term, which speaks favorably for the air cargo market going forward and for our business.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>Okay. And then my follow-up, John or Spencer. So let's hope this is a once in a 100-year event with COVID. But this is certainly a unique opportunity here for cargo operators or, as I say, the more natural players in the market. So you have, I'm guessing, expanded flying with Amazon due to e-commerce. Capacity that you've competed with via main deck isn't coming back, let's say, for two to three years, you have this cost reduction program. I don't think you put any targets around there, but that's out there. And of course, you have the outstanding CBA with the IBC. So we put all these together, and we assume ASMs for the passenger airlines are not going to hit pre cover levels for, say, two to three years. What's driving why can't we see 10% to 15% EBITDA growth for the next two to three years, and then you start to work down your leverage to three and hopefully something to closer to 2.5?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>In so I mean, the number of things you identified, again, speak very favorably for us. We're looking to the future with optimism, but also with a realistic view as we talked about the regulatory environment. Should COVID continue much longer into the future, things can get disrupted pretty quickly, and that could have a pretty immediate impact potentially. But absent that, and taking advantage of the market fundamentals that were really strong coming into this. We haven't ruled out the kind of performance you're talking about. And when you mentioned the debt ratio, we're just about there now. So the EBITDA growth, we're excited about the future, and we plan to continuing to focus on how we grow EBITDA going forward.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>That's really helpful.</p><p><strong>Operator</strong></p><p>And we have a follow-up question from the line of Scott Group from Wolfe Research. Your line is open.</p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p>So can we just get an update on the military how much was that business down? How much is it recovering? And then you said something about military down in the fourth quarter. I think that's when the new fiscal year starts. So maybe just give us an update on the share. And expectations for the next fiscal year.</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>So I'll give an overall view of the military and how that's played out, and then spencer can get into some of the specifics on the numbers. But as a result of the stop move order that the DoD issued. There was a slowing. It didn't cease, but a slowing of the military business, particularly in the passenger side. I was cautionary to protect our troops and their families from the spread of COVID. And there was essential movements that were continuing to go, both passenger and cargo, but the passenger side was more heavily impacted. Cargo was down, but somewhat steady. The stop move order restrictions started to lift and they were scheduled to expire at the end of June and toward the beginning of June, they started to ease and more exceptions were permitted. So we've seen both cargo and passenger return. And going forward, we expect that trend to continue. We expect passenger demand to normalize to what the levels were pre coved and cargo to continue at a strong pace. So Spencer, I don't know if you have any specific numbers you want to share.</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>I'll just add, Scott, that our share or what the military calls entitlement has remained fairly steady at a 53% to 54% for both cargo and passenger flying. And then I think John covered the trends really well. So overall, we expect military flying this year to be down from where it was in the previous year. But as John said, we expected to kind of get back to what it previously was.</p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p>Okay. And then just my last one for you, John. So generating lots of free cash. Are you going to be buying any planes? Or is this all going to be going toward the balance sheet? And then bigger picture if Boeing is not going to be making 747s anymore. What's going to be the future for Atlas longer term?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Sure. So we're going to be looking at all opportunities with our cash. And aircraft are certainly part of it. Our balance sheet is absolutely a part of it. And what may lie beyond. We're in a fortunate position to be able to look at all those opportunities. So I look forward to keeping you posted on that. With regard to the 747 and Boeing's announcement [that Dell] discontinued production. After the last one is delivered, I think, is in 2022, toward the end of '22. And we're sad to see the queen of the Sky cease production, for sure. But it's a great airplane. And Boeing has committed to us to commit to continue to service those aircraft. They've got some great customers of the 747 Atlas included UPS included. So they'll need to continue to support from an engineering and a spare parts standpoint. And they've told us that directly, and I believe them. They've demonstrated in the past that they've done that with the 747-200s, for example, and Boeing is a great partner. The 747, I think, personally, over time, not only is it a great airplane, but over time, it's going to have scarcity value as well. It has capabilities that no other freighter has, including nose loading for the pure freighters, the no loading capability, the payload and the range. They're still the 747-400s are still of right age, they're generally in the 20-year old time period. So they've got a long life left in the DASH-8s or the best technology and capability in the market today from a freighter standpoint. So we feel good about the 747s going forward. And you'll recall the 747-200s, which is a much lesser aircraft, lived in a useful life way beyond their 30 years. So we remain optimistic and bullish on the aircraft. And frankly, all our fleets, but the 747, particularly.</p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p>Okay, thank you guys.</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Thanks, Scott.</p><p><strong>Operator</strong></p><p>And your next follow-up question comes from the line of Chris Stathoulopoulos from Susquehana. Your line is open.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>Spencer. So free cash flow here in the second quarter are pretty significant. I know you have you benefited from the stronger charter yields, and I'm guessing above your minimum utilization levels, but how much of your ACMI book reset in the quarter?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>We don't really talk about customer turnover like that. But typically, we try to have our ACMI contracts on a staggered basis, so we don't have too many coming due in any particular year. There's usually about a handful of them in any given year. And you're right, free cash flow is incredibly strong in the second quarter from higher earnings, lower costs, lower core capital expenditures. And we expect to enjoy record free cash flows.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>And on the U.S. DoD stop order movement, has that been lived? Or are we still in the situation where, I think, John, on the last call you described the utilization levels on the scale from 0 being planes around at five firing on all engines. I think you said a 2- or 3, where are we with that piece?</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Yes. The stop movement order is no longer in effect. And the levels of operations are returning to more normal and expected levels. Now covet could impact that forward. But right now, that's the state of play.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>Okay. Last question, if I could, Spencer, has Atlas applied for anything under the loan program under Cares? And were there any warrants attached with the payroll support? Or was that a straight grant and no loan attached to it?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Sure, Chris. Yes, Atlas. Atlas participated in the Cares Act program that was available to air cargo carriers. We received an aggregate amount of $406.8 million between Atlas and southern. It's comprised of grants as well as loans. The loans are 10-year unsecured non advertising promissory note. And there is a small amount of warrants associated with that. Up to 625,452 shares, but that would be the kind of maximum amount as Atlas can at it's choosing settle those shares on a net basis. And so you never really get to that amount. So it's either net cash or net stock and so you'd never really issue that many shares. So yes, we certainly participated in the Cares act available to cargo carriers.</p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p><p>That's for the payroll support. Have you applied for the loan program, the separate...?</p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>I'm sorry, that was your question. Okay. Sorry, Chris. No, we did not.</p><p><strong>Operator</strong></p><p>And there are no further questions at this time. Mr. John Dietrich, I turn the call back over to you for some closing remarks.</p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p>Great. Great. Thank you, Rob. And on behalf of all our employees here at Atlas, Spencer and I would like to thank you for your interest in Atlas Air worldwide. We appreciate you sharing your time with us today. We hope you stay safe, and we look forward to speaking with you again soon. Thank you very much.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 59 minutes</strong></p><h2>Call participants:</h2><p><strong>Edward J. McGarvey</strong> -- <em>Vice President, Treasure</em></p><p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p><p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p><strong>David Griffith Ross</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p><p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p><p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p><p><strong>Christopher Nicholas Stathoulopoulos</strong> -- <em>Susquehanna Financial Group -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/aaww">More AAWW analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Atlas Air Worldwide Holdings, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAtlas%2520Air%2520Worldwide%2520Holdings%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=42a1200b-1564-46e0-8830-eeb293b53f6a">ten best stocks</a></strong> for investors to buy right now… and Atlas Air Worldwide Holdings, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAtlas%2520Air%2520Worldwide%2520Holdings%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=42a1200b-1564-46e0-8830-eeb293b53f6a" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-41313", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAWW"], "primary_tickers_companies": ["Atlas Air Worldwide Holdings, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Atlas Air Worldwide Holdings Inc (AAWW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 9, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-41313"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-41313", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAWW"], "primary_tickers_companies": ["Atlas Air Worldwide Holdings, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Atlas Air Worldwide Holdings Inc (AAWW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 9, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], AAWW earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Atlas Air Worldwide Holdings Inc</strong> <span class="ticker" data-id="209494">(<a href="https://www.fool.com/quote/nasdaq/atlas-air-worldwide-holdings-inc/aaww/">NASDAQ:AAWW</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">11:00 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Earnings Call for Atlas Air worldwide. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]</p>, <p>I would now like to hand the conference over to your speaker today, Atlas Air Worldwide. Thank you. Please go ahead.</p>, <p><strong>Edward J. McGarvey</strong> -- <em>Vice President, Treasure</em></p>, <p>Thank you, Rob, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2020 results conference call. Today's call will be hosted by John Dietrich, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at atlasairworldwide.com under presentations in the Investor Information section. As indicated on slide two, we'd like to remind you that our discussion about the company's performance today include some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements.</p>, <p>For information about risk factors related to our business, please refer to our 2019 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release, and in the appendix that is attached to today's slides. During our question-and-answer period today, we'd like to ask participants to limit themselves to one principal question and one follow-up question. So that we can accommodate as many participants as possible. After we have gone through the queue, we'll be happy to answer any additional questions as time permits.</p>, <p>At this point, I'd like to draw your attention to slide three and turn the call to John Dietrich.</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Thanks, Ed, and hello, everyone. Welcome to our second quarter earnings call. Clearly, the world has changed in ways none of us could have ever imagined just a few short months ago. It's hard breaking to see so many people so adversely impacted by COVID-19. We're all grateful to those working on the front lines in this coronavirus fight including all the healthcare workers treating the patients, the doctors and scientists working in the labs to bring an effective vaccine to market as soon as possible and so many others who are contribute to relief efforts. We at Atlas feel a tremendous sense of pride, purpose and responsibility in the essential role we're playing in the global supply chain. The goods we carry quite literally help save lives. They are also fueling the economy and supporting jobs. The entire Atlas team has stepped up and delivered high-quality service for our customers despite the many challenges presented by this pandemic, including a variety of travel restrictions, testing protocols, quarantine mandates and other operational challenges. I couldn't be more proud of all our employees and the work they're doing, particularly our crew and ground staff out in the field. I'd like to thank them all for their extraordinary efforts. I'd also like to take this opportunity to acknowledge and thank the U.S. government for all the support provided to our industry as we continue to manage through the regulatory and operational issues created by COVID-19.</p>, <p>At Atlas, safety is and will continue to be our top priority, and we're taking every precaution to safeguard all our employees. We also appreciate our customers and vendors' commitment to safety and their partnership in Unity as we protect not only our employees, but our operations as well. Now I'd like to turn to the business in our second quarter results on slide four. Atlas Air worldwide had an exceptional quarter as revenue and earnings continue to exceed our expectations. These positive results were primarily driven by the team, capitalizing on strong demand and higher yields in our commercial Charter and South America businesses and we also continue to provide the U.S. military with essential services, and our ACMI customers flew well above their minimum guarantees. As many of you know, we operate the world's largest fleet of 747 freighters along with large fleets of 777, 767s and 737s that play a key role in our customers' operating networks. Our fleet and our service offerings are unmatched in this industry. To serve the increased demand we're seeing, we quickly reactivated three of our 747-400 converted freighters and operationalized the 777 freighter from our dry leasing business.</p>, <p>This enabled us to serve the strong and profitable shorter-term demand, while also entering into numerous new long-term charter programs at attractive yields. We expanded our long-term charter business to include new agreements with manufacturers such as HP, Inc. and large freight forwarders like DHL Global Forwarding, Apex Logistics, DB Shanker, Flexport and Geodis, all that wanted to secure committed capacity from us. In addition, our second quarter results benefited from the CMI aircraft we added to our fleet in 2019, including five incremental 737s for Amazon, two incremental 777s for DHL and two incremental 747 to four hundreds for Nippon Cargo Airlines. And we also placed an existing 747-400 in CMI service with LL earlier this year. The quarter also benefited from lower aircraft rent and depreciation, lower fuel prices and an expected refund of excess aircraft rent paid in prior periods. These benefits were partially offset by higher maintenance expense related to additional engine overhauls and other maintenance we performed to take advantage of attractive vendor pricing discounts and slot availability in the current environment.</p>, <p>We also experienced lower AMC passenger demand as the U.S. military took precautionary measures to limit nonessential travel, lower 747 Dreamlifter flying due to Boeing slowdown of its 787 Dreamliner production and higher crew costs related to the 10% pay increase we provided to our pilots effective May 1, pending the completion of our joint collective barring agreement and premium pay, we're providing for our pilots for operating into certain areas outside of the U.S. that have been significantly impacted by COVID-19. During the second quarter, we executed on very favorable business opportunities in a challenging operating environment with the safety of our employees is our top priority. We continue to leverage the scale of our world-class fleet the scope of our global operations and the flexibility of our business model to capitalize on the current favorable market dynamics. As we take advantage of opportunities to grow our business, we're also mindful of the importance of disciplined financial management, particularly in the evolving and uncertain environment. In that regard, we've taken a number of steps, including significantly reducing nonessential employee travel, limiting ground staff hiring in the use of contractors and tightening spending in virtually every area of the business. We also remain focused on ensuring that our resources are allocated to opportunities that generate the best returns. With that in mind, we've decided to exit certain older unprofitable 737 to 400 aircraft.</p>, <p>And we've renegotiated other customer agreements to drive enhanced profitability as we committed to do. We're also taking actions to increase our liquidity and further strengthen our financial position. This includes the sale of certain nonessential assets and our participation in the Cares Act payroll support program for air cargo carriers that we announced in June. As indicated on slide five, we're reintroducing our full year 2020 outlook. Reflecting our first half results and our current expectations for the balance of the year and subject to any material COVID-19 developments, we expect to fly more than 330,000 block hours this year, with about 70% of those in the ACMI segment and the remainder in Charter. We anticipate full year 2020 revenue of just over $3 billion and adjusted EBITDA of approximately $750 million. Our outlook also anticipates approximately 50% of our full year 2020 adjusted net income to occur in the second half of the year. That would result in our 2020 adjusted net income being more than double that of 2019. As many of you know, we've historically generated the vast majority of our earnings in the second half of the year. This year, however, and due to the strength of the first half, we anticipate our full year 2020 adjusted net income to be more evenly split between the first and second half of the year.</p>, <p>Maintenance expense for the year is expected to total approximately $480 million, with depreciation and amortization totaling about $255 million and core capital expenditures, which exclude aircraft and engine purchases, are projected to total approximately $80 million to $90 million, mainly for parts and components for our fleet. We also expect our full year 2020 adjusted effective income tax rate to be approximately 23%. Looking at the third quarter, we've seen commercial charter yields moderate from the second quarter, but they still remain elevated and very attractive compared with typical yields for this time of year. We anticipate that our adjusted net income for the third quarter will represent approximately 20% of our full year results. This will be more than six times higher than adjusted net income of $9.5 million in the third quarter of 2019. We also expect to fly more than 85,000 block hours in the third quarter with revenue of nearly $800 million and adjusted EBITDA of about $170 million. So this will be a good time for me to ask Spencer to provide a review of our second quarter 2020 results.</p>, <p>So Spencer, over to you. And after which, I'll be happy to take your questions.</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Thank you, John, and hello, everyone. Our strong second quarter results are highlighted on slide six. On an adjusted basis, EBITDA totaled $247 million with adjusted net income of $123.2 million. On a reported basis, net income was $78.9 million. Our adjusted earnings in the second quarter included an effective income tax rate of 21.6%. Moving to the top of slide seven. Operating revenue totaled $825.3 million in the second quarter. ACMI revenue during the quarter primarily reflected lower block hours driven by the redeployment of 747-400 aircraft to charter to support the numerous new long-term charter programs that John noted. Partially offset by an increase in 777, 737 and 747-400 CMI flying. Higher Charter revenue was primarily driven by increased flying and a higher average rate per block hour. Block hour volume growth primarily reflected strong demand for freighter aircraft, driven by the disruption of global supply chains, the reduction of available cargo capacity in the market, the redeployment of 747-400 aircraft from ACMI and a 777 freighter from dry leasing and our ability to increase utilization. And dry leasing revenue, primarily related to changes in leases and the disposition of certain nonessential aircraft during the first quarter of this year.</p>, <p>Looking now at the bottom of the slide, segment contribution totaled $210.2 million in the second quarter. ACMI earnings primarily reflected increases in CMI flying and a reduction in aircraft rent and depreciation expense. These benefits were offset by the redeployment of 747-400 aircraft to charter, higher heavy maintenance expense including additional engine overhauls to take advantage of availability and pricing discounts and higher pilot costs, including the 10% pay increase and the premium pay for operating in certain areas. Higher charter contribution was also driven by the increase in commercial cargo yields and demand for freighter aircraft. Charter contribution also benefited from lower aircraft rent and depreciation and the redeployment of aircraft from ACMI and dry leasing. These benefits were partially offset by lower passenger demand from the U.S. military and the higher heavy maintenance expense and pilot costs. In dry leasing, lower contribution was primarily due to changes in leases and the disposition of certain nonessential aircraft during the first quarter. Now turning to slide eight. As the slide shows, our net leverage ratio improved significantly during the second quarter, decreasing from 4.4 times at the end of the first quarter to 3.0 times at the end of the second quarter.</p>, <p>And we expect further improvement as the year progresses as we benefit from increased EBITDAR levels, a strong cash balance and maintaining debt payments of approximately $70 million per quarter. We ended the second quarter with cash, including cash equivalents, restricted cash and short-term investments totaling $739.2 million compared with $113.4 million at the end of 2019. Our improved cash balance at June 30 primarily reflected strong cash provided by operating activities and also include the funds we received through the payroll support program. Net cash provided by financing activities primarily reflected proceeds from debt issuance and from our revolving credit facility partially offset by payments on debt obligations. Net cash used for investing activities primarily related to core capital expenditures and spare engines and upgrade kits partially offset by proceeds from the disposal of certain nonessential aircraft and engines. As a reminder, our debt has a low weighted average coupon rate, which now stands at 3%, and the vast majority is secured by our aircraft assets, which have a value well in excess of the related debt. We remain committed to a strong balance sheet. And as John outlined earlier, we are taking actions to mitigate the impact of any continuation or worsening of the pandemic. By reducing costs, enhancing liquidity and strategically allocating resources.</p>, <p>Now I'd like to turn it back to John.</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Thank you, Spencer. And moving to slide nine. As I mentioned earlier, Q2 was an exceptional quarter for Atlas Air worldwide, and we have a very favorable outlook for the remainder of 2020. Atlas will continue to play an essential role in the global supply chain. And we're taking every precaution to keep our employees safe and ensure that we continue to transport the goods, the world needs during these challenging times. With an exceptionally talented team of employees, a strong balance sheet, of fleet and operating capabilities that are unmatched in our industry will continue to deliver safe and high-quality service for our customers and strong results for you, our investors.</p>, <p>So with that, operator, I'd like to turn it over to you take our first question. Thank you.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-89535">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-89535');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] And your first question comes from the line of David Ross from Stifel. Your line is open.</p>, <p><strong>David Griffith Ross</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>Yes, thank you very much and Yes. I wanted to first talk about the longer-term Charter business that you mentioned, the opportunity here with a strong yield environment to lock up some of these transactional customers for a little bit longer than a quick transaction. Do any of these extend after 2020? Or is this kind of good to go to take us through year-end? And then who knows after that?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Yes. Thank you, David. And the answer is yes, they do extend beyond 2020. The characterization of long-term reflects that from our perspective. And the way we're looking at them is they're very much ACMI like while taking advantage of the current market dynamics and the yields that the market is gaining right now. So yes, well through 2020.</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Yes. Dave, if I could just add, some of these agreements, several of these agreements go into the second half of 2022. Several of them are late in 2021. So their longer-term charter arrangements, they are much more ACMI like in nature. And I've talked about before the blurring between ACMI and charter that has started to happen in our business. And these new long-term charter arrangements sort of further that. So you can think of this as sort of medium shorter-term ACMI or medium or longer-term charter, if you want to think of it that way.</p>, <p><strong>David Griffith Ross</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>Okay. So that's helpful. It's really a long-term contract, not just long-term for charter, kind of like a long weekend. Or something along those lines. These are years. Yes. And John, you mentioned in the comments that the South America businesses were particularly strong in South America business what was driving that? Can you comment a little bit more about the regional strength?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>I think it was a combination of a number of factors. Of course, the reduction in overall capacity in the market was a contributor. We're a strong player with the large wide-body aircraft we have in that market to begin with. So when you take the reduced capacity along with the schedule reliability that we have and the connectivity of our network, all those factors contributed to really strong yields for us and strong demand.</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>And Dave, we have relationships with all the big forwarders there and the big charter movers. And Atlas is one of, if not the top mover into and out of the Miami airport from South America. So that relationship and that commitment to that region is really helpful.</p>, <p><strong>David Griffith Ross</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>And then last question, just on the pilots. You saw the or you had the 10% pay increase go into effect in the last quarter, which I'm sure was well received. Has there been any improvement in the negotiations or talks with the union since the pay increase went into effect? And any comments around service levels? Have they also seen any improvement?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Yes, David, I think we've seen a lot of changes over the last number of months in the pilot situation. We did offer and the union accepted the 10% pay increase, we work closely with the union leadership to enter into a, what's called a memorandum of understanding an MOU to provide premium pay for those flying into some of the international hotspots with COVID. That's gone a long way to help the operation and our crew members make a little more money in the company to continue operating. All that, coupled with the negotiations that now have a defined path forward in the merger we've talked about earlier, the courts have weighed in, the arbitrators have weighed in and the clock is now ticking on the nine months of bargaining. That started in May of this year, and the parties are continued to negotiate in bargain. So we've seen a lot of forward progress as well as a tremendous effort from our crew members at a time where the world needs them the most, and that's now through this pandemic. So it's been a great operation, and our customers are happy and our pilots have the opportunity to take advantage and enjoy some of the benefits with the pay increase in the premium pay.</p>, <p><strong>Operator</strong></p>, <p>Your next question comes from the line of Bob Labick from CJS Securities. Your line is open.</p>, <p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p>, <p>Congratulations on just outstanding operating performance. I wanted to start, can you maybe talk a little bit about the direct contribution, distribution between ACMI and charter in the quarter. And obviously, ACMI contribution was lower, I would assume, related to the heavy maintenance and timing of maintenance. How should that factor into the back half of the year for ACMI? And how should we think about direct contribution? Because they just swung so wild this quarter as long as a little guidance there?</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Yes. Sure, Bob. It's spencer. Yes, in ACMI, we had higher heavy maintenance, especially incremental engine overhauls and other repairs. We have given what's happening with some of the passenger airlines, we have opportunities to take advantage of open windows for performing maintenance. So there's slot availability. In addition to that, we are being offered discounts that we can take advantage of. And so we're performing maintenance at lower costs. And so we're saving quite a bit on that. So we've accelerated some maintenance that perhaps would have been performed later this year or especially maintenance into next year. So we've accelerated some of that to take advantage of this. And then that has an impact. We allocate those costs based on block hours. And so 70% of that gets allocated to ACMI. And so anyway, that has an impact certainly on those results. There's maintenance in 2021, as I said, that we're going to move into this year. Some we already did in the second quarter, I just mentioned, but some later this year. And so that will impact that contribution. If you were to back out the incremental maintenance, if you were to back out the crew premium pay that we are paying, and you were to back out the 10% increase, you'd see an ACMI margin in the second quarter that was higher than the second quarter of last year. So that's something to think about. If you think about sort of a normalized run rate.</p>, <p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p>, <p>Got it. Okay. That's great. And then obviously, you've discussed a little last call a little bit more today, the long-term Charter contracts. Have they impacted this quarter in particular? Or is this really more for the kind of back half and going out through partially 2022, as you mentioned? And how does that decision made to call it a Charter contract versus an ACMI contract? What actually does distinguish it now?</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Yes. Good question. So the contracts, there are a good number of them, which is great. And we're entering into those. It's great for the customer. It gives them the capacity that they are looking for at less than current market really high yields. It's great for us because they're generally higher than a typical ACMI rate and the term, as we talked about, is longer. So it's kind of a win-win for the customer and for the company. To your question about what's the difference between ACMI and Charter, as I said, it's starting to get [blurrier], but in charter, the customer generally pays on a per trip basis, an all-in rate, which includes fuel. In ACMI, customer typically pays for fuel on its own and pays us on a block hour basis, not a per trip basis. So the differences are getting really slight, but those are the primary ones.</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Yes. I think also, there are a lot of other ancillary services in the charter side that are not necessarily included in the ACMI product that can be on a kind of a line item basis. And I'll just touch on the fuel that Spencer mentioned. While fuel is included, there are also protections in our agreements for wild swings in fuel, if should that happen, and it's indexed to account for significant swings that could occur over longer periods of time.</p>, <p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p>, <p>Got it. Okay. Great. And last one for me, if I could. Just as it relates to the obviously strong environment, can you talk about ACMI renewals, assuming you're still doing some of those as well. You're shifting, obviously, some to long term charter. But as ACMI contracts come up, how is that renewal process for you? And has it been playing out directionally?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Yes. Thanks, Bob. We feel really good about that. It's a good market to be in cargo right now. And I think those ACMI customers that we do have are very pleased that they have them on a long-term basis. I think prospective customers and existing customers who may be thinking about more aircraft, I think it's an attractive proposition for them to fix their rates and do so on a market competitive basis. Generally speaking, the Charter rates are a little bit higher. So it's a way for them to secure their costs and take advantage of the market. So we're excited about the future prospects of both the ACMI and the long-term charter arrangements for that reason.</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>And Bob, I'll just add, Spencer, John talked about earlier, the sort of flexible nature of our business or the resiliency of our business. And one of the great benefits that our company has is to we have ACMI, we have shorter-term charter. We have longer-term charter. We have dry leasing, and we can move aircraft between all of those to take best advantage of each of those marketplaces and to serve each of those customers.</p>, <p><strong>Robert James Labick</strong> -- <em>CJS Securities, Inc. -- Analyst</em></p>, <p>Got it. Sounds great. Thank you very much.</p>, <p><strong>Operator</strong></p>, <p>Your next question comes from the line of Helane Becker from Cowen. Your line is open.</p>, <p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p>, <p>I just have a couple of questions. On the 747s that you brought back, were you did you write those off last year accelerate depreciation? And do you have to reverse that at some point this year?</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Sure. Good question, Helane. No, we temporarily park them. So we continue to depreciate them and bringing them back was a really easy decision. It was very inexpensive to bring them back. They needed just a tiny amount of maintenance. We quickly performed that and got them back going. So not much of an impact on the business overall. And then we've been really able to use them quite well, especially during the second quarter for sure. And then we expect to continue using them at least through the end of this year.</p>, <p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p>, <p>Okay. That's very helpful. And my other question actually is on the 737-400s that John referred to as you're getting out of them. And I saw that there was a southern aircraft in modification, I guess, in China being modified, I guess, the aircraft and 800 said, operated by Southern. So I guess the assumption is that southern is going to use the 737-800. Is there going to be a write-off associated with the 400s? Or are you parking those? What are you doing with those planes?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>So the 737-400, Helane, you may recall, in a prior earnings call, we talked about reviewing all of our operations and phasing out those that were unprofitable. This was one of them. And so we don't and southern did not own those aircraft. They were third-party aircraft, so they were CMI. So they'll go back to the customer. In the 737-800s, you're talking about, yes, Southern has a few more 737-800 coming, and we look forward to bringing them online.</p>, <p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p>, <p>Okay. Are those CMI are you owning those?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Those will be CMI.</p>, <p><strong>Helane R. Becker</strong> -- <em>Cowen and Company -- Analyst</em></p>, <p>Okay. That's very helpful. And then if I could just sneak one more question in about the peak. How are you thinking about the peak this year? I mean, you're seeing such demand right now. And I know, Spencer, you and I talked about that a couple of months ago, the demand you're seeing and so on, you're doing a lot of charters, blah, blah, blah. But what are you thinking about the peak? I mean, is this sustainable all year long?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Well, we feel really good about the peak. I do. And I absolutely think it's sustainable this year. As we're seeing in the media and in the industry, the expectations of passenger belly capacity to come back into the market have slowed dramatically. They will eventually come back. But with the, call it, resurgence or continuation of COVID, that's not happening as quickly as I think many hoped. That plays well for our business, frankly. And that, coupled with a lot of the secured agreements we already have in place that we do for the peak season. A lot of those deals are already fixed. As well as the demand we're seeing just generally and not just PPE, but both PPE and general manufactured goods, that we have capacity still to sell. And we believe the yields will continue to be very strong for the weeks and months to come and certainly through peak.</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>And Helane, it's spencer. I'll just add just a little bit to that is that we expect that peak will be strong for general cargo like consumer products, and we think it will be strong for e-commerce and express shipments, for sure. For all the reasons that John talked about. Another indicator for the airfreight peak demand, obviously, we're out talking to our customers all the time. They expect the same. But another indicator ocean carriers are currently enjoying a good peak, and that's usually a pretty good indicator. For us and what our customers expect. Based on what we're hearing and we're seeing, we really don't expect things to get back to the way they used to be from a capacity standpoint overall, certainly well into 2021, if at all.</p>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Your next question comes from Scott Group from Wolfe Research. Your line is open.</p>, <p><strong>Scott H. Group</strong> -- <em>Wolfe Research, LLC -- Analyst</em></p>, <p>So I just want to follow-up on the long-term short-term charter stuff. So can you just directionally tell us how much of the commercial charter now is long-term charter and then can you just directionally talk about where these rates are relative to a year ago? And can you just clarify, are these new long-term charter rates? Are they locked in through next year? Are the rates still variable?</p>, <p><strong>John W. Dietrich</strong> -- <em>President and Chief Executive Officer</em></p>, <p>So the rates are locked in. And as Spencer said, these deals are very ACMI like. I'll caveat that and say the fuel piece of it, there are adjusters if fuel swings heavily in one direction or the other. But other than that, they're locked in. And they're locked in for the longer period of time. So again, I would think of it in terms of ACM I like. In terms of percentage of the total charter business, I don't know, Spencer, if you have a percentage number, but you see from my prepared remarks, there are a number of new deals, five or six new customers in that regard. So you're looking at least an aircraft per customer there. So it's sizable.</p>, <p><strong>Spencer Schwartz</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-41313", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAWW"], "primary_tickers_companies": ["Atlas Air Worldwide Holdings, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Atlas Air Worldwide Holdings Inc (AAWW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 9, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-41313"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-41313", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAWW"], "primary_tickers_companies": ["Atlas Air Worldwide Holdings, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Atlas Air Worldwide Holdings Inc (AAWW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 9, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | AAWW earnings call for the period ending June 30, 2020. | I would now like to hand the conference over to your speaker today, Atlas Air Worldwide. Thank you. Please go ahead.\n Thank you, Rob, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2020 results conference call. Today's call will be hosted by John Dietrich, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at atlasairworldwide.com under presentations in the Investor Information section. As indicated on slide two, we'd like to remind you that our discussion about the company's performance today include some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements.\n For information about risk factors related to our business, please refer to our 2019 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release, and in the appendix that is attached to today's slides. During our question-and-answer period today, we'd like to ask participants to limit themselves to one principal question and one follow-up question. So that we can accommodate as many participants as possible. After we have gone through the queue, we'll be happy to answer any additional questions as time permits.\n At this point, I'd like to draw your attention to slide three and turn the call to John Dietrich.\n Thanks, Ed, and hello, everyone. Welcome to our second quarter earnings call. Clearly, the world has changed in ways none of us could have ever imagined just a few short months ago. It's hard breaking to see so many people so adversely impacted by COVID-19. We're all grateful to those working on the front lines in this coronavirus fight including all the healthcare workers treating the patients, the doctors and scientists working in the labs to bring an effective vaccine to market as soon as possible and so many others who are contribute to relief efforts. We at Atlas feel a tremendous sense of pride, purpose and responsibility in the essential role we're playing in the global supply chain. The goods we carry quite literally help save lives. They are also fueling the economy and supporting jobs. The entire Atlas team has stepped up and delivered high-quality service for our customers despite the many challenges presented by this pandemic, including a variety of travel restrictions, testing protocols, quarantine mandates and other operational challenges. I couldn't be more proud of all our employees and the work they're doing, particularly our crew and ground staff out in the field. I'd like to thank them all for their extraordinary efforts. I'd also like to take this opportunity to acknowledge and thank the U.S. government for all the support provided to our industry as we continue to manage through the regulatory and operational issues created by COVID-19.\n At Atlas, safety is and will continue to be our top priority, and we're taking every precaution to safeguard all our employees. We also appreciate our customers and vendors' commitment to safety and their partnership in Unity as we protect not only our employees, but our operations as well. Now I'd like to turn to the business in our second quarter results on slide four. Atlas Air worldwide had an exceptional quarter as revenue and earnings continue to exceed our expectations. These positive results were primarily driven by the team, capitalizing on strong demand and higher yields in our commercial Charter and South America businesses and we also continue to provide the U.S. military with essential services, and our ACMI customers flew well above their minimum guarantees. As many of you know, we operate the world's largest fleet of 747 freighters along with large fleets of 777, 767s and 737s that play a key role in our customers' operating networks. Our fleet and our service offerings are unmatched in this industry. To serve the increased demand we're seeing, we quickly reactivated three of our 747-400 converted freighters and operationalized the 777 freighter from our dry leasing business.\n This enabled us to serve the strong and profitable shorter-term demand, while also entering into numerous new long-term charter programs at attractive yields. We expanded our long-term charter business to include new agreements with manufacturers such as HP, Inc. and large freight forwarders like DHL Global Forwarding, Apex Logistics, DB Shanker, Flexport and Geodis, all that wanted to secure committed capacity from us. In addition, our second quarter results benefited from the CMI aircraft we added to our fleet in 2019, including five incremental 737s for Amazon, two incremental 777s for DHL and two incremental 747 to four hundreds for Nippon Cargo Airlines. And we also placed an existing 747-400 in CMI service with LL earlier this year. The quarter also benefited from lower aircraft rent and depreciation, lower fuel prices and an expected refund of excess aircraft rent paid in prior periods. These benefits were partially offset by higher maintenance expense related to additional engine overhauls and other maintenance we performed to take advantage of attractive vendor pricing discounts and slot availability in the current environment.\n We also experienced lower AMC passenger demand as the U.S. military took precautionary measures to limit nonessential travel, lower 747 Dreamlifter flying due to Boeing slowdown of its 787 Dreamliner production and higher crew costs related to the 10% pay increase we provided to our pilots effective May 1, pending the completion of our joint collective barring agreement and premium pay, we're providing for our pilots for operating into certain areas outside of the U.S. that have been significantly impacted by COVID-19. During the second quarter, we executed on very favorable business opportunities in a challenging operating environment with the safety of our employees is our top priority. We continue to leverage the scale of our world-class fleet the scope of our global operations and the flexibility of our business model to capitalize on the current favorable market dynamics. As we take advantage of opportunities to grow our business, we're also mindful of the importance of disciplined financial management, particularly in the evolving and uncertain environment. In that regard, we've taken a number of steps, including significantly reducing nonessential employee travel, limiting ground staff hiring in the use of contractors and tightening spending in virtually every area of the business. We also remain focused on ensuring that our resources are allocated to opportunities that generate the best returns. With that in mind, we've decided to exit certain older unprofitable 737 to 400 aircraft.\n And we've renegotiated other customer agreements to drive enhanced profitability as we committed to do. We're also taking actions to increase our liquidity and further strengthen our financial position. This includes the sale of certain nonessential assets and our participation in the Cares Act payroll support program for air cargo carriers that we announced in June. As indicated on slide five, we're reintroducing our full year 2020 outlook. Reflecting our first half results and our current expectations for the balance of the year and subject to any material COVID-19 developments, we expect to fly more than 330,000 block hours this year, with about 70% of those in the ACMI segment and the remainder in Charter. We anticipate full year 2020 revenue of just over $3 billion and adjusted EBITDA of approximately $750 million. Our outlook also anticipates approximately 50% of our full year 2020 adjusted net income to occur in the second half of the year. That would result in our 2020 adjusted net income being more than double that of 2019. As many of you know, we've historically generated the vast majority of our earnings in the second half of the year. This year, however, and due to the strength of the first half, we anticipate our full year 2020 adjusted net income to be more evenly split between the first and second half of the year.\n Maintenance expense for the year is expected to total approximately $480 million, with depreciation and amortization totaling about $255 million and core capital expenditures, which exclude aircraft and engine purchases, are projected to total approximately $80 million to $90 million, mainly for parts and components for our fleet. We also expect our full year 2020 adjusted effective income tax rate to be approximately 23%. Looking at the third quarter, we've seen commercial charter yields moderate from the second quarter, but they still remain elevated and very attractive compared with typical yields for this time of year. We anticipate that our adjusted net income for the third quarter will represent approximately 20% of our full year results. This will be more than six times higher than adjusted net income of $9.5 million in the third quarter of 2019. We also expect to fly more than 85,000 block hours in the third quarter with revenue of nearly $800 million and adjusted EBITDA of about $170 million. So this will be a good time for me to ask Spencer to provide a review of our second quarter 2020 results.\n So Spencer, over to you. And after which, I'll be happy to take your questions.\n Thank you, John, and hello, everyone. Our strong second quarter results are highlighted on slide six. On an adjusted basis, EBITDA totaled $247 million with adjusted net income of $123.2 million. On a reported basis, net income was $78.9 million. Our adjusted earnings in the second quarter included an effective income tax rate of 21.6%. Moving to the top of slide seven. Operating revenue totaled $825.3 million in the second quarter. ACMI revenue during the quarter primarily reflected lower block hours driven by the redeployment of 747-400 aircraft to charter to support the numerous new long-term charter programs that John noted. Partially offset by an increase in 777, 737 and 747-400 CMI flying. Higher Charter revenue was primarily driven by increased flying and a higher average rate per block hour. Block hour volume growth primarily reflected strong demand for freighter aircraft, driven by the disruption of global supply chains, the reduction of available cargo capacity in the market, the redeployment of 747-400 aircraft from ACMI and a 777 freighter from dry leasing and our ability to increase utilization. And dry leasing revenue, primarily related to changes in leases and the disposition of certain nonessential aircraft during the first quarter of this year.\n Looking now at the bottom of the slide, segment contribution totaled $210.2 million in the second quarter. ACMI earnings primarily reflected increases in CMI flying and a reduction in aircraft rent and depreciation expense. These benefits were offset by the redeployment of 747-400 aircraft to charter, higher heavy maintenance expense including additional engine overhauls to take advantage of availability and pricing discounts and higher pilot costs, including the 10% pay increase and the premium pay for operating in certain areas. Higher charter contribution was also driven by the increase in commercial cargo yields and demand for freighter aircraft. Charter contribution also benefited from lower aircraft rent and depreciation and the redeployment of aircraft from ACMI and dry leasing. These benefits were partially offset by lower passenger demand from the U.S. military and the higher heavy maintenance expense and pilot costs. In dry leasing, lower contribution was primarily due to changes in leases and the disposition of certain nonessential aircraft during the first quarter. Now turning to slide eight. As the slide shows, our net leverage ratio improved significantly during the second quarter, decreasing from 4.4 times at the end of the first quarter to 3.0 times at the end of the second quarter.\n And we expect further improvement as the year progresses as we benefit from increased EBITDAR levels, a strong cash balance and maintaining debt payments of approximately $70 million per quarter. We ended the second quarter with cash, including cash equivalents, restricted cash and short-term investments totaling $739.2 million compared with $113.4 million at the end of 2019. Our improved cash balance at June 30 primarily reflected strong cash provided by operating activities and also include the funds we received through the payroll support program. Net cash provided by financing activities primarily reflected proceeds from debt issuance and from our revolving credit facility partially offset by payments on debt obligations. Net cash used for investing activities primarily related to core capital expenditures and spare engines and upgrade kits partially offset by proceeds from the disposal of certain nonessential aircraft and engines. As a reminder, our debt has a low weighted average coupon rate, which now stands at 3%, and the vast majority is secured by our aircraft assets, which have a value well in excess of the related debt. We remain committed to a strong balance sheet. And as John outlined earlier, we are taking actions to mitigate the impact of any continuation or worsening of the pandemic. By reducing costs, enhancing liquidity and strategically allocating resources.\n Now I'd like to turn it back to John.\n Thank you, Spencer. And moving to slide nine. As I mentioned earlier, Q2 was an exceptional quarter for Atlas Air worldwide, and we have a very favorable outlook for the remainder of 2020. Atlas will continue to play an essential role in the global supply chain. And we're taking every precaution to keep our employees safe and ensure that we continue to transport the goods, the world needs during these challenging times. With an exceptionally talented team of employees, a strong balance sheet, of fleet and operating capabilities that are unmatched in our industry will continue to deliver safe and high-quality service for our customers and strong results for you, our investors.\n So with that, operator, I'd like to turn it over to you take our first question. Thank you.\n | Atlas Air Worldwide Holdings Inc | (NASDAQ:AAWW) | Aug 6, 2020 | 11:00 a.m. ET | 11 | am | 2020-08-06 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | Clearly, the world has changed in ways none of us could have ever imagined just a few short months ago. | Clearly, the world has changed in ways none of us could have ever imagined just a few short months ago. | [0.5128254 0.05257848 0.4345961 ] | positive | 0.460247 | 2020-08-07 | 59.810001 | 61.150002 | 53.259998 | 56.150002 | 1490329.0 | 56.209999 | 59.450001 | 55.740002 | 59.070000 | 1296893.0 | Logistics & Transportation | 2020-06-30 | 2020-06-30 | 4.71 | 2.173447 | 2020-06-30 | AAWW | 2.536553 | beat | -0.740002 | decrease | 0 | positive |
| 3 | AAXN | /earnings/call-transcripts/2020/08/08/axon-enterprise-aaxn-q2-2020-earnings-call-transcr.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Axon Enterprise</strong> <span class="ticker" data-id="205639">(<a href="https://www.fool.com/quote/nasdaq/axon-enterprise/aaxn/">NASDAQ:AAXN</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 06, 2020</span>, <em id="time">5:00 p.m. ET</em></p><h2>Contents:</h2> <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul> <h2>Prepared Remarks:</h2> <br/> <p><strong>Operator</strong></p><p>Hello, everyone. Welcome to Axon's second-quarter 2020 earnings conference webinar. I'm Andrea James, SVP of corporate strategy and investor relations. Thank you for joining us over Zoom.</p> <p>We do appreciate that today is a particularly crowded earnings day and our thoughts are with those of you who are dealing with the tropical storm. Today, we have available Axon's CEO, Rick Smith; President Luke Larson, CFO Jawad Ahsan, Chief Revenue Officer Josh Isner, and Chief Product Officer Jeff Kunins. We feel great bringing you guys the whole team. First, we're going to give prepared remarks, and then, we'll bring our analysts on camera for questions.</p> <p>[Operator instructions] I hope everyone has had a chance to read the shareholder letter, which we released after the market closed. You can find it investor.axon.com. Our remarks today are meant to build upon the information in that letter, which is very robust. If for some reason, there's an Internet outage beyond our control or we lose Zoom connectivity, we'll make every effort to post a copy of our prepared remarks to investor.axon.com this evening.</p> <p>During this call, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today, are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.</p> <p>These risks are discussed in our SEC filings. OK. Please go ahead, Rick.</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Thank you, Andrea, and thank you, everyone, for joining us today. During our last quarterly update in May, one of the biggest issues we addressed was how we were managing our business through a pandemic. One quarter later, we have so much more to talk about because we've all watched thousands of people take to the street demanding -- holdings in public safety reform. Our company's reason to exist, our mission is for exactly moments like right now.</p> <p>Protect life, we are on a mission to make energy weapons so safe and so effective that we make bullets obsolete. We preserve truth. Body cameras protect officers to bad claims and citizens from bad behavior, increasing transparency and reducing social conflict. We accelerate justice with advanced cloud software and AI that have potential to make the entire justice system more fair and more effective.</p><p></p><div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Axon Enterprise</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAxon%2520Enterprise%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=65a645d5-8458-473c-b6fc-563f39678cb0">ten best stocks</a></strong> for investors to buy right now… and Axon Enterprise wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAxon%2520Enterprise%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=65a645d5-8458-473c-b6fc-563f39678cb0" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div><p>When you think of gun bans, social conflicts, an unfair justice system, most people don't think of these as technology problems, but it's political problems. We frame them there's problems where technology can play a transformative role. Now technology is no panacea yet and it cannot solve these problems for us. However, almost any problem can be solved faster and more effectively with the right technology tools to help people solve them.</p> <p>So as we look at all the pain and anger today, we ask ourselves what can we do to help promote equity. Our super power is creating technology to address social problems that many others see as intractable. So we've added a fourth mission to inspire our work. Centering racial equity, inclusion, and diversity, which might make you wonder how can you build technology to promote equity? If you want to hear specific examples of how we are using technology to support this new mission, you'll have to wait and come join us at our conference Accelerate later this month.</p> <p>We've made Axon can't change the policies and cultural norms in policing, but we can build the tech tools to help our customers do it. We're hearing consistent and emphatic calls for change from the most prominent leaders of law enforcement and we are excited to build the tools to help them. Back when we began investing in body cameras in 2008, we faced innumerable skeptics, but we knew that body cameras were the future. And body cameras started to gain traction after a wave of protests began in Ferguson, Missouri in 2014, which was really the birth of the Black Lives Matter movement.</p> <p>At the time, we were delivering the right capabilities at the right time and our investments in cloud software made body cameras suddenly feasible and affordable for all agencies. We invested in body cameras when nobody believed they were possible, and as the investment community well knows, our core body camera and software business lost money from 2008 to 2019 when it began to turn to profit. Those 11 years of continuous investment in R&D to prove that the feasibility and sustainability of body cameras are now the foundation for our next leg of growth. In 2020, we're humbled to be developing solutions that once again find themselves relevant to a national conversation about policing.</p> <p>We do not shy away from these hard discussions and we see the pain and the nuance behind demands to define police. This is really all about reforming and reshaping the justice system and these are issues that we engage with daily. They're not new to us. We invite input from a broad spectrum of voices.</p> <p>We have the industry's most relevant and productive ethics board. With renewed calls from reform, we can leverage technology and policy changes to improve public safety. We believe that our product moment fit is why our pipeline continues to strengthen as communities see the power of our platform to drive positive change. And now with that, I'm going to turn it over to our president, Luke Larson. </p><p><strong>Luke Larson</strong> -- <em>President</em></p> <p>Thanks, Rick. In a few weeks, on August 25th, as Rick mentioned, we'll be hosting our annual technology summit Axon Accelerate. Due to COVID, we've shifted this to a virtual event, which has allowed us to grow the event to reach a much bigger scale of our audience and customers. We're also able to offer a cutting-edge virtual reality track.</p> <p>If you'd like to attend, go to axon.com and register. We're very excited to share some key customer updates and product announcements on how Axon can help officers and the communities they serve ensure everyone makes it home safe. Our strategic priorities in 2020 are to continue to execute in our core market while accelerating our path to market in new product categories. Our engineering and product teams are solving some of the most difficult problems at the intersection of the physical and digital worlds to advance our mission.</p> <p>This is also a year where we have walked beside our customers in one of the most challenging environments they have ever faced. Our customer-facing teams have built amazing relationships with our customers, not by selling devices or software. But by becoming trusted advisors on how we can help customers with the important problems they are facing. We are helping them to source mission-critical technology amid greater public budget scrutiny helping them to access federal dollars where available and we aspire to be true partners to our customers.</p> <p>We are emphasizing the mission-critical importance of our OSP 7+ offering, de-escalation, transparency, and productivity have never been more critical to police and community relations during this watershed moment and our offerings address these exact situations. This emphasis drove our Q2 results with revenue up 26% year over year. This is a strong performance in the context of one of the toughest macros we've faced, a global pandemic and massive economic uncertainty. Our strong results were also driven by a stellar quarter for international, up 80% year over year to $34 million.</p> <p>This was on top of 38% international revenue growth in Q1. We are just getting started in large markets such as Brazil and India and three countries topped $1 million in revenue for the first time in the quarter; Indonesia, Panama, and Thailand. Turning to the bottom line. GAAP income was affected by stock-based compensation and tax expense.</p> <p>Adjusted EBITDA was $28 million, reflecting a 20% margin, which showcases our cost discipline and some travel savings related to COVID. Turning to operations. You will see the inventory build on our balance sheet. This was very intentional.</p> <p>We have adopted well -- we have adapted to an ongoing supply chain environment that we've never seen. Recall that last year, we diversified our supply chain and global manufacturing footprint due to tariffs and it turns out that those initiatives positioned us well to handle COVID-19. Even so, given the number of unforeseen challenges that could lay ahead and the fact that 2020 is full of curve balls, we've elevated our inventory build in the first half. This safety stock helps minimize shipping disruptions and also prepares us for some key Axon Body 3 shipments to major customers in Q3 and taser orders we are expected to fulfill in the back half of the year.</p> <p>Currently, we expect Q3 inventory levels to remain about the same. And by the end of the year, they could come down by as much as 10%. And with that, I'll turn it over to our chief financial officer, Jawad.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Thanks, Luke. Our second-quarter performance was a testament to our ability to deliver sharp execution in a challenging environment. Although demand remained robust, domestic customers were often baned with constraint, dealing with COVID-19, personnel outages, employee safety concerns, and caution about uncertain budgets. Even with these challenges, Q2 revenue was generally in line with our pre-pandemic expectations.</p> <p>Domestic body camera bookings remained strong and our international expansion continues to accelerate. Our results in the quarter speak to our resilience as a company and the critical importance of our products and our customers' lives. A few years ago, we set out on a journey to transform into an enterprise software company that also sells devices and our performance this past quarter further solidifies that path. High-margin annual recurring revenue grew 42% to $183 million.</p> <p>Software revenue was a record 30% of total sales and we sustained a SaaS net revenue retention of 119%. Turning to our -- our outlook. We're watching to see whether states shut down in the fall, which could bring renewed caution on budgeting. There is just enough outside of our control regarding COVID-19 that we did not reinstate formal full-year guidance.</p> <p>We did provide a range that we are managing toward for Q3. There are two factors to keep in mind when considering our interim Q3 guidance. The first is that we made a strategic and intentional decision to prioritize growing our cloud user base and adding nodes to our network in the early days of our software and sensors business. As a result, we have contracts with strategically important agencies, both domestically and internationally, that have served as beachhead accounts, but come with a lower margin than average.</p> <p>The second factor is that the majority of our multi-year contracts come with hardware refreshes at periodic intervals, which come at a lower margin than the SaaS portion of these contracts. The confluence of these two factors will conspire in Q3 to be a headwind on our gross margins, which we expect will normalize by Q4. Anticipating a question we often receive these days. We are not seeing changes in buying activity due to police defunding concerns.</p> <p>In fact, we've seen some anecdotal acceleration of body camera buying decisions due to agencies wishing to provide transparency to their communities. We remain confident in our long-term multi-year outlook. We're privileged to be working on solutions to some of society's most entrenched challenges. We are just getting started in several new markets internationally and in several new software product lines.</p> <p>Importantly, the addition of capital from our recent follow-on offering, further strengthen our balance sheet, and provides us with even greater flexibility to continue investing for growth. At quarter end, we had $675 million of cash and investments and zero debt. Before we move to Q&A, I'd like to share some insight with you as to how we view the company relative to the investments we're making and where we're headed. The first phase of the company's growth, let's call it, Axon 1.0, saw us establishing the taser business and building an unparalleled sales channel with law enforcement.</p> <p>The second phase of our growth, Axon 2.0 saw us continuing to innovate with the introduction of smart devices, including body-worn and in-car cameras, which integrated seamlessly with our customer-focused cloud network. Now, we're entering the next phase of our growth, Axon 3.0, we're building a rapidly evolving public safety ecosystem with both connected devices in intuitive workflows powered by AI with the increasingly powerful Axon Cloud as our centerpiece. Our mission with this ecosystem is to protect life, capture truth, and accelerate justice. Now more than ever, society is driving toward these outcomes and Axon is uniquely positioned to partner with our customers and deliver on all three.</p> <p>And with that, Andrea, let's move to questions.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thank you, Jawad and team. Thanks so much. Moderators, can we bring everyone up into gallery view? OK. Thank you.</p> <p>We'll take our first question from James Faucette with Morgan Stanley. Go ahead, James.</p><p><strong>James Faucette</strong> -- <em>Morgan Stanley -- Analyst</em></p> <p>Great. Thank you very much. I wanted to ask the team, Rick, Luke. Obviously, there's a lot of pressure on police departments, that at the very least, to improve efficiencies, etc.</p> <p>Where are we now in terms of some of the software products like records, dispatch, etc. to really effectively reduce time that officers have to spend on paperwork, etc. And so, they can spend more time in the field and gain efficiencies that way? And how well are you being able to communicate the current capabilities to the customers?</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Well, I would say the best answer to that question will be if you tune in to Accelerate. We have some pretty significant new announcements and we'll be showcasing some new capabilities that will have a big impact on efficiency. One of which, we've been in field trials that will go -- it's going into full release. And I can tell you that one agency in Canada was testing one of those capabilities said it was absolutely transformative.</p> <p>They had two homicides happen in a short period of time, and for a small agency, this created tremendous -- tremendous levels of workload. And one of our new AI products actually help them handle two simultaneously. That they said without us, they would have been at risk actually potentially having those cases at risk of getting this qualified because they would not have been able to process all the paperwork and the interior data to meet the judicial deadlines. So stay tuned to Accelerate for more, but both records and dispatch are live in the field.</p> <p>And we're now beginning to start really linking some of the AI capabilities to power the creation of the structured data in those systems from the unstructured data we capture with our body cameras.</p><p><strong>James Faucette</strong> -- <em>Morgan Stanley -- Analyst</em></p> <p>Got it. And then as a follow-up, you mentioned Canada, but it was interesting, at least to us, to see the big jump in international revenue. Where are you and how should we be thinking about the ability that you have in other international markets to take the success of taser and take it over to body cameras and some of the other software products in those markets?</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Josh, why don't you start answering that as the head of sales?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Yeah. Thanks very much, James, for the question. Ultimately, I think we see a lot of similarities regarding where international is now versus where domestic was four or five years ago, and we're very much following the same playbook. We're going to be focused on fewer markets than the entire world and we're going to continue to build out a few markets at a time over the next few years.</p> <p>I think the investments we made in our Tier 1 markets a couple of years ago, building really talented teams there, focusing on expanding both taser, and getting our early body camera and DEMS customers there are why you're starting to see the revenue results now. And as we continue to build bookings up internationally, we expect revenue to follow in future years. So our focus is to build very, very talented teams in the markets that we see as potential movers, and we'll start to introduce some of our newer products into those markets that are already showing great results. And as more and more markets kind of come up to speed, we'll introduce our newer and newer products as those markets become larger markets and deployments of body cameras and TASERS.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thanks, James. We'll take the next question from Keith Housum at Northcoast. Go ahead, Keith.</p><p><strong>Keith Housum</strong> -- <em>Northcoast Research -- Analyst</em></p> <p>Thanks. Good afternoon, guys. Rick, in terms of the budget relief, which the government is considering, is there any impact to your guidance if budget relief is offered to the state and local agencies over the next several months?</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. I think it'd just be pretty speculative for us to speculate on what might go in there. Obviously, if there's a lot of money, specifically, earmarked to state and local agencies. We suspect in this environment that it would end up being focused toward a lot of the transparency tools, things we're doing with body cameras, etc.</p> <p>We've also seen a lot of interest in corrections growing around the TASER weapons because COVID-19 still remains a big issue, and particularly, in combined environments. So there is more focus on maintaining safe distances, you know, traditionally in corrections, if you have an inmate that decides that they're going to become resistant to following the procedures they have to, that has meant correctional officers suiting up and having to go hands on in a very close personal -- you're -- you know, covered in each other's sweat and other things you really worry about. So we're -- our plan does not account for any additional federal funding. If it comes in, I think there could be a little bit of upside, but I wouldn't -- I don't want to speculate too much.</p><p><strong>Keith Housum</strong> -- <em>Northcoast Research -- Analyst</em></p> <p>Fair enough. Jawad, just a little bit of housekeeping here. In terms of the EBITDA margins for the next quarter, what's the impact of your large contracts on your EBITDA margins?</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. That was part of what we signaled with our Q3 guidance, Keith. We have some large international customers. We have a couple of international -- sorry, domestic customers that have -- we consider to be strategic beachhead accounts where their margins are lower on the camera contracts.</p> <p>And as those customers get the refreshes on their contracts in the quarters that we ship, which Q3 happens to be one we're going to see lower margins, which is why we gave that specific guidance for Q3.</p><p><strong>Keith Housum</strong> -- <em>Northcoast Research -- Analyst</em></p> <p>Right. But would it be fair to say the impact of those large shipments is going to be 2% on EBITDA margins. Is that fair assumption?</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Well, it's -- we are anticipating the EBITDA margins to be 12% on our Q3 revenues. We don't have formal guidance for the year. So I can't officially say what that impact is going to be.</p><p><strong>Keith Housum</strong> -- <em>Northcoast Research -- Analyst</em></p> <p>All right. Fair enough. Thank you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Yeah, Keith. And if you dive into the segment commentary in the shareholder letter, we're even more specific on the gross margin thoughts by segment.</p><p><strong>Keith Housum</strong> -- <em>Northcoast Research -- Analyst</em></p> <p>Great. Thank you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Uh-huh. We'll take our next question from Joe Osha with JMP. Go ahead, Joe.</p><p><strong>Joe Osha</strong> -- <em>JMP Securities -- Analyst</em></p> <p>Hi, thank you for taking my question. One of the questions that's come up around this notion of police funding is the idea that some functions might be taken over by non-sworn officers. I'm wondering about how Axon sees the opportunity to address those types of uh -- those types of people? Thank you.</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. Let me take that one on. So first of all, I had a really interesting call with a major city Police Chief where we were talking about the defunding phenomenon and what happened. And what he related to me was actually -- they did reassign portions of its budget to other portions of the city.</p> <p>So basically, they just shifted some resources out of police to other city agencies. And then, its net budget was actually increased fairly significantly for body cameras and transparency tools. So in that respect, he was pleasantly surprised that the whole defunding discussion actually led for their agency to a better place, allow them to focus in on their core mission a bit more, reliance on partner agencies within the city to take a little more of the load, and it ultimately gave them a little more budget for tech. Now ultimately, you know, we'll see how this plays out in other agencies, but we believe that this idea that right now law enforcement, they're doing a lot of social services.</p> <p>They're dealing with homeless people and mental health issues because you pick up the phone and you dial 911 for a lot of things that maybe don't need a cop. And so, as we think about our dispatch software, what a great time to be introducing a new cloud-based dispatch capability where we can, obviously, shift our road map and be looking at introducing new features. Things would allow agencies to perhaps integrate better with other city agencies that might not traditionally need dispatch or [Inaudible] type roads to use some of our communication tools in ways that would allow the dispatchers to dispatch non-sworn officers to different types of events. So we -- we tend to love change as an organization and times are changing rapidly here.</p> <p>And we view that our DNA sets us up well to move quickly to new opportunities.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>That's right. And Joe, I think how we talked about when we last spoke, about when you think about something like dispatch and you think about something like Axon Aware and building geolocation and live streaming into our cameras, really being part of a bigger mission for agencies around real-time operations and broadening that lens. This is exactly the perfect scenario for which that is purpose built. And so even right out of the box, the integration of Axon Dispatch and Axon Aware, bringing together the ability to bring other kinds of resources into an incident in real-time is a capability that is just native to our cloud-born approach to all of these categories.</p><p><strong>Joe Osha</strong> -- <em>JMP Securities -- Analyst</em></p> <p>Thank you. And just following on that, if I may. Is it possible perhaps that we might see an opportunity to deploy Axon Body alongside some of this new dispatch technology with non-sworn community officers or whatever we're going to call them?</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Absolutely. You now, we're seeing also, not only the ability for non-sworn officers to be able to use cameras. But for sworn officers, be able to live stream with folks like mental health experts that can be helping them in real time, dealing with complex situations where those officers might need more expertise. But we actually think this could open up some litigation areas, particularly, if you have unarmed, non-sworn people, your ability to identify emerging dangers becomes even more important because you have to rapidly route armed officers to the scene to help out.</p><p><strong>Joe Osha</strong> -- <em>JMP Securities -- Analyst</em></p> <p>Thank you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Great. Thanks so much, Joe. We'll take our next question from Scott Berg at Needham. Go ahead, Scott.</p><p><strong>Scott Berg</strong> -- <em>Needham and Company -- Analyst</em></p> <p>Hey, everyone, congrats on a great quarter. Thanks for taking a couple of questions here. I guess, first, I don't know if this is a question for Luke or for Rick. But Rick, in your newsletter, you talked about OSP pipelines in particular very strong, including the components for RMS? Now you just signed a really large contract with Baltimore that includes records.</p> <p>But I guess, what are you seeing on the records level out there, maybe from a demand perspective that would suggest those OSP 7 contracts with records will actually be implemented and utilized? Because that seems early given the commentary, but obviously, great if that's the case.</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Sure. [Inaudible] Josh --</p><p><strong>Jeff Kunins</strong> -- <em>Chief Product Officer</em></p> <p>I'll take that.</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Or Jeff if you want to start off.</p><p><strong>Jeff Kunins</strong> -- <em>Chief Product Officer</em></p> <p>Yeah. I'll go ahead and take that. So I love that question. And so again, like we talked about last quarter, we're thrilled that well more than a dozen agencies are already live signed or being actively deployed on records, you know, using one or more modules of the product, and we're incredibly confident of the trajectory.</p> <p>As you've seen with the Baltimore announcement, both committed adoptions among OSP customers, as well as, continued interest in the pipeline beyond that, continue to accelerate well ahead of even our expectations. And I think the two key things at play there, like we talked about before, the first is the power of the bundle makes it an easy choice for them to take advantage of that benefit at a perceived value point that goes -- that goes hand-in-hand with what they're already paying for because it's effectively -- it's already included with the money that we've already committed to. And then second, is this key notion that we've talked about at Axon Standards, which is this use-of-force reporting module. And what's beautiful about Standards is that it just so happens in Records that every agency has to do use-of-force reporting, but they typically use a third-party module for it.</p> <p>They don't actually use their historical RMS. But because Standards is built right into Axon Records, it's the perfect first experience that they can use it as an and rather than an or with their legacy RMS to begin getting value out of it right away with incredibly easy deployment. And then from there, decide when they're ready to migrate their entire RMS. And that's exactly what happened with Cincinnati and we're seeing that same pattern play out as we go forward because it's incredibly easy to deploy, it works side-by-side with what they've already got.</p> <p>And then as they come to love it, whenever they're ready, they can quickly decide to adopt full Records for their entire RMS needs.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. And specifically on the pipeline, I would say, you know, we are seeing more and more agencies interested in OSP 7+ and we're seeing some acceleration from the agencies that bought OSP 7+ last year in adopting our Standards module of records, as well as, a lot of the other key modules like reporting and so forth. So I'm very confident in our team to be able to convert some of those OSP 7+ opportunities into RMS deployments. We're very focused on and we're very focused on making sure that our customers are valuing and adopting all of the benefits in OSP 7+.</p> <p>And this is a place where I think, certainly, the combination of having a very, very strong product organization with a very, very strong channel should lead to outsized results down the road.</p><p><strong>Scott Berg</strong> -- <em>Needham and Company -- Analyst</em></p> <p>Super helpful. Thanks, guys. Then, I guess, just as a quick follow-up, Jawad. The company has posted four straight quarters of greater than 25% revenue growth, which is a nice acceleration from the 12-month period before that.</p> <p>Your guidance calls for 15% revenue growth in the third quarter. Is that just some being conservative in the current lights and macroenvironment? Or are you seeing anything else that's maybe tempering that guidance just a little bit? Thank you.</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Yeah. I'll tag team. This is Josh with you, if that's all right. But we have a plan -- an operating plan for the year that had informed our guidance, and that's still pretty much informed as what we're managing to.</p> <p>We outperformed in Q1 and Q2. We were very happy with the performance of our business and our sales team. The investments we've been making in international has been really paying off. Some of these new markets, new products, but we don't, obviously, bank on that.</p> <p>And so, we feel it's prudent to stick relatively close to what our operating plan is, which is inform the 15% guidance.</p><p><strong>Jeff Kunins</strong> -- <em>Chief Product Officer</em></p> <p>Yeah. Ultimately, there are going to be some quarters that have higher revenue growth rates than others and we feel good about full year. We feel good about kind of our long-term trajectory. But we do view this year as being back-half weighted compared to the front half, and it just might be an issue between what comes in, in Q3 and what comes in, in Q4 of our kind of large CW deal pipeline.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thanks, Team. And also in the back half, just on a comparables, the percentages are lower, but the nominal dollar's much higher is what Josh means on that. Thanks, Scott, for your questions. OK, we'll turn to Charlie Anderson at Dougherty.</p> <p>Go ahead, Charlie.</p><p><strong>Charlie Anderson</strong> -- <em>Dougherty and Company -- Analyst</em></p> <p>Thanks. So I wanted to ask about bookings. It was very interesting to see the the bookings transit very much reflects what we're seeing in the business in terms of international, strong, domestic, not as strong. I wonder, is that just a snapshot in time where, is that the way we should think about the trajectory of the business in terms of international continuing to put up the big performance in domestic, maybe trailing the performance on a year-over-year basis? And then secondly, you made a comment on bookings about the first few weeks of the quarter better than April.</p> <p>I wonder if you could just layer in some context in terms of what that means from your standpoint and what's going on there? I got a follow-up.</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. Thanks, Charlie. We've got a lot of domestic sales people and leaders on the call here that hopefully are motivated by that question and we certainly expect a great back half from our domestic and international teams. I think there was -- if you look back at it, we lost about half the Q2 due to the pandemic shutdown.</p> <p>Everyone was trying to figure out how to conduct like City Council meetings and really conduct business on Zoom for the first time and that certainly slowed down some of our momentum in the first half of Q2. And then really in June, we lost about two weeks due to the kind of civil unrest and the events that followed the killing of George Floyd. So you know, I would look at Q2 more as just kind of a unique point in time due to some external factors that slowed us down a little domestically, but we have high expectations of our team and they're very motivated to turn that trend around in Q2 -- or I'm sorry, in Q2 -- or in Q3, both domestically and internationally.</p><p><strong>Charlie Anderson</strong> -- <em>Dougherty and Company -- Analyst</em></p> <p>OK. Great. And then a question about the fleet product. You were -- there were some points in the shareholder letter about the importance of that product in the back half.</p> <p>So I wonder, we can see what the run rate has been in the past few quarters of the existing product. I'm curious if you can maybe help us with expectations for how much of a contributor that is? Does it lift to a meaningfully higher level than we've seen historically? Just any context around that launch would be helpful. Thanks.</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>So I think from a bookings perspective, we do expect Fleet 3 to be a contributor in the back half of the year. I think there's still some question about shipping Fleet 3 and shipments, depending on how well the T&Es go, might end up in the front half of 2021, as opposed to the back half of 2020. We don't expect that to have much of an impact on revenue and bookings, like I said, given the fact that we'll be doing T&Es. It will contribute to bookings and we feel great about -- Fleet 2 has really stabilized in the last couple of quarters in terms of customer satisfaction and so forth.</p> <p>And we're excited to build on that momentum as we launch Fleet 3, certainly, the ALPR and modular capabilities of Fleet 3, where we can do 360-degree recording around the car and so forth are things our customers are excited about. And we absolutely are confident that we're going to get a great customer reaction from this product and be followed by bookings and revenue associated with it.</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>And just to add one clarifying comment there. So we're going to be in some pretty in-depth trials in the back half of this year, but we don't expect to be in full production ramp of Fleet 3 until 2021 and that's where we'll see the real growth contribution.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>And the key, you know, Josh mentioned this with Fleet 3, in addition to it being our best ever in-vehicle camera system, straight-up its a camera system that will also be the launch, as we've said before, of our approach are pretty disruptive and novel approach to the automatic license plate recognition. Category and mobile, where fundamentally -- it's different than the way it's done today in the market by being disruptively more affordable and better, more cost-effective for better performance and results, by making it a thing that departments can put in every single police vehicle as opposed to a small number of very expensive purpose-built cameras. And of course, no matter how good any one camera is that can only be in one place. And then, you combine that with it being built from the ground up with ethics and privacy in mind, and our strategic partnership with Flock Safety for a similar approach for fixed ALPR cameras.</p> <p>We really think it's a watershed change in the way ALPR as a category will work.</p><p><strong>Charlie Anderson</strong> -- <em>Dougherty and Company -- Analyst</em></p> <p>Great. Thank you so much.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thank you, Charlie. OK. We'll move to Mark Strouse from JP Morgan. Go ahead, Mark.</p><p><strong>Mark Strouse</strong> -- <em>J.P. Morgan -- Analyst</em></p> <p>Hey, thanks, everybody. Thanks for taking our questions. Pretty impressive international growth the last couple of quarters. Just kind of curious, are you -- what trends you're seeing as far as those customers signing up for recurring payment plans? Or are these really just kind of one-off purchases?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Hey, Mark. Great to see you again and thanks for the question. So ultimately, I think it's a combination of a few things. Certainly, as we open up new international markets, those first-time orders are probably not going to be on recurring payment plans.</p> <p>That's due to our -- we want to make sure we have the ability to collect on all these plans. And when we enter markets for the first time, we'd like to see some payment history there first. So that -- those will be kind of one-time contributors to revenue and we expect those to continue from newer markets, as well as, markets making their second and third buys in their TASER programs. The teams have done an awesome job, especially in the U.K.</p> <p>and in Canada, driving most of our new deals toward subscriptions. In the U.K., I believe almost every or every department is already on a TASER payment plan as opposed to one-time purchases. I think we'll see more of that in Australia over the next 12 months as T7 starts to get legs there and same in Canada. And so, I think in our more established international markets, we'll definitely see more recurring payments on CWs and video alike.</p> <p>And then in our newer kind of first and second time buyer type markets, those will be driven by more one-time revenue transactions there as we shift those new weapons.</p><p><strong>Mark Strouse</strong> -- <em>J.P. Morgan -- Analyst</em></p> <p>OK. Thanks, Josh. And then Rick, this is the highest cash balance that you've had in a long time, maybe ever. Can you just talk about your plans for that cash? I mean, obviously, there's a lot of organic investments that you've been talking about for the last several quarters, but how should we think about M&A? How important is that going to be going forward now with this cash truer than enough?</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. Got it. I can't help but smile. I remember the days when we're struggling to pay the light bill and putting stuff on credit cards.</p> <p>You know, we've got almost $700 million in cash. I would also say that historically, as you know, I'm a skeptic on M&A that I think I'm a Chicago school guy, markets are pretty efficient. M&A a lot of times it always drives up the price of the acquired, frequently to the detriment of the acquirer. And we still approach M&A from that position that it has to be unquestionably more valuable as a part of our ecosystem than as a stand-alone in order for an acquisition to make sense for all the headaches that come with integrating different companies.</p> <p>That being said, I think we are in a unique position where we have built, and we now have this fairly ubiquitous cloud software and connected hardware and ecosystem, then make things like partnerships Flock Safety become pretty -- pretty powerful, as well as, we are really building out our M&A function. It's actually under Andrea James, who's doing a fantastic job. We've been building out a team beneath her. We get a ton of inbound inquiries and the vast majority of the time we say, no, because we are on a mission.</p> <p>We've got a lot of focus, but we are starting to see -- there are things that will be interesting partnerships and there are some things that could be interesting acquisitions, and we have plenty of cash to have the flexibility to do it when it makes sense. But I just want to reassure you, we start from the position of no and that we have to overcome some pretty skeptical hurdles before we're going to spend the money, you, our shareholders gave us. We're going to treat it very carefully, as if it's the same money I was using to pay those light bills 25 years ago.</p><p><strong>Mark Strouse</strong> -- <em>J.P. Morgan -- Analyst</em></p> <p>Good. Thank you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thanks, Mark for the questions. Thanks, Rick. All right. We'll take our next question from Jeremy Hamblin with Craig-Hallum now.</p> <p>Thanks, Jeremy. Go ahead.</p><p><strong>Jeremy Hamblin</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p> <p>Thanks, Andrea. So my question is actually a follow-up really on that that cash balance and what you potentially could do with it. You know, you've built some inventory here. You have some clients that may be strapped a little bit in the near-term on cash flow.</p> <p>Do you use some of that cash to potentially do kind of TASER 60-type financing here, where we look to bridge the gap in the near term while there may be some budget crunch? And that's one of the uses of cash.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. I'll start with this one. So one of the things I love about our cash balance and our position, our balance sheet is the optionality it provides us. And Jeremy, you've honed in on a couple of things that we've been able to do with that optionality.</p> <p>One is of course, the inventory build. It was a material amount of cash in the quarter and we felt like it was the right thing to do. It positions us really well to be able to deliver the much-needed products to our customers in the back half of the year and beyond. And then on the payment plans, which you know, you touched upon, Josh first brought this up when the coronavirus really started becoming problematic for our customers.</p> <p>There were concerns about budgets and we talked about, hey, look, we're signing up multi-year contracts with our customers. We have long-standing relationships with them. We're going to have relationships that -- with them that will extend far beyond the coronavirus, and so, we want to make sure that we're doing right by them. And it's easier for us to get flexible on payment terms to help bridge them to a time when they are no longer -- they don't have concerns about budget.</p> <p>And so, when you have five, 10-year contracts, you can get creative and that's what we've done. It's been fairly -- on a smaller scale, it's been fairly negligible across the entire portfolio of contracts, but it is something that we've offered in select cases.</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Yeah. I would just nod to that and say, like, ultimately, while there have been some data points to suggest individual customers asking for kind of a rework of their accounts receivable. It hasn't been very widespread. I personally attribute this to the fact that we have customers that are paying for value that we are delivering across our product lines and we haven't seen any of these kind of asks like to push payments out multiple years or to not pay us for the -- anything for the next couple of years.</p> <p>I think ultimately, our customers are seeing value in what we're delivering and we're very honored to continue to provide that value to this market, and only in very kind of edge cases have we had to entertain situations like that.</p><p><strong>Jeremy Hamblin</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p> <p>Great. And then just a follow-up question here on your progress on federal contracts. In terms of thinking about the negotiations in those contracts, the tenure of the contracts, are you seeing them extend longer when you're having discussions? It's still somewhat early in the ramp of that channel of business. Are they looking to start shorter contracts and see how it goes, and then -- and then, get into some longer deals? Just any color you can share on progression there?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Sure thing. So a gentleman by the name of Richard Coleman has just done a fantastic job over the last couple of years, building up our federal pipeline. And for the first time, we are seeing customers willing to engage in multi-year engagements with us on both body cameras, but also on the TASER side. So we're very excited.</p> <p>There are, you know -- it's not always easy to get federal customers to buy hardware in kind of annual phases as opposed to one-time purchases. So we're learning a little there and there is some of that, but other federal agencies are heavily engaged in these five-year plans for both weapons and video. Federal takes time, it's a slog, but for the first time in really 10 years here, I feel like we're starting to break through and crack the code of how to work with federal customers, and that's largely due to Richard's contributions. And hopefully, we start to see a lot of that growth materialize over the next couple of years here.</p><p><strong>Jeremy Hamblin</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p> <p>Thanks, guys. Good work. Good to be back on this one.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thanks, guys.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Welcome back, Jeremy. Good to see you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>I think we want to get through to at least, I think, four more analysts. So we'll keep this going here. Jonathan Ho from William Blair. Go ahead, Jonathan.</p><p><strong>Jonathan Ho</strong> -- <em>William Blair and Company -- Analyst</em></p> <p>Can you hear me, OK? Great. So just relative to, I guess, the current budget environment, are you seeing traditional RFP processes perhaps start to stall? And could that maybe open up some more opportunities for you to disrupt the traditional, I guess, RFP-driven acquisition process for our RMS cat?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Yeah. Great question, John. And I think ultimately, I haven't seen a huge change in procurement methods. I think some agencies still are issuing RFPs, others are issuing sole sources, and others are issuing more like cooperative procurements or piggy back -- piggy backing off of other contracts that are already in place.</p> <p>And so, I'm not sure a ton has changed there. I think the big thing for us is to focus on OSP 7+ adoption because in that event, the customer is already essentially getting the opportunity to deploy our RMS in that bundle. And so, the more we drive up OSP 7+ procurements, the more agencies are exposed to kind of our enterprise software before they make a formal buying decision. And so, that's kind of how we're looking at things in terms of CAD and RMS.</p> <p>And I think that strategy is paying off and we're seeing a lot of interest in those products via that purchasing mechanism. And certainly, every day that goes by, we're also getting closer to being ready to compete in RFPs for CAD and RMS to see Baltimore issued an RFI for RMS and we were victorious. So we're -- some competitors that we have a lot of respect for in this market. So we're excited about where this business is going.</p><p><strong>Jonathan Ho</strong> -- <em>William Blair and Company -- Analyst</em></p> <p>Got it. And then just one for Jawad. In terms of the decision to increase inventory, can you maybe give us a little bit more color in terms of what types of components you had concerns around and maybe what risks you're seeing around the supply chain? Thank you.</p><p><strong>Luke Larson</strong> -- <em>President</em></p> <p>Yeah. Maybe I'd lead off on that and then Jawad could add some additional context. So as we looked at really our kind of next six to 12 months based on our previous experience with really adjusting for tariffs, we wanted to make sure that we were going to be able to supply our customers with key products for two major upgrades, AB3, as well as, TASER 7. And so, we made the decision to add additional inventory to ensure that we would have product on hand for those in addition to making sure that we would have a good buffer for any potential supply chain disruptions due to COVID.</p> <p>We also have a couple really, really big orders coming in Q3 that are kind of outside the context of our normal inventory build. I would let you know, the majority of that inventory is going into finished goods, which is something that me and Josh Isner feel really strongly about it. We can build it up into a finished product, we're going to find a home for it.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. And the only other thing I'd add from a financial standpoint, this doesn't happen often. But there have been times when we've left revenue on the table at the end of the quarter because we didn't have inventory and that's not a great thing to have happened. And especially when you've got the flexibility with our balance sheet to be able to have a bit of an inventory buffer.</p> <p>And so, you know, that's what we've committed to. And in addition to the factors that Luke mentioned, we never want to be in a position where we leave revenue on the table.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thanks, guys. We'll take a question now from will Will Power at Baird. Go ahead, Will.</p><p><strong>Will Power</strong> -- <em>Robert W. Baird & Co. -- Analyst</em></p> <p>Hey, great. Thanks. You know, Rick, you suggested that it doesn't sound like you're seeing too much of a negative impact from some of the police defunding initiatives today. But I'm wondering if you could comment now that we're in the back half of the year on some of the early discussions with respect to municipal budgets, agency budgets as in -- for 2021.</p> <p>What's your sense for their expectations and how that could potentially flow through [Inaudible]?</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah, I'm actually going to hand back to Josh because I think Josh is a little closer to the budgeting side of things. Josh, can you take that one?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Yeah, sure. So I appreciate the question. I think there has been some reaction from some customers in this regard, right? Like, if you're a major city that relies heavily on tourism, then certainly, that's going to have an impact on how you think about budgeting for the next year. The good new -- the good news here, though, is that customers are viewing our products as mission-critical products.</p> <p>Like the -- customers, there's no willingness to not outfit police with TASERS or body cams. And of course, computer-aided dispatch and RMS are also in that bucket. So I think there is some impact to budgets overall. But when you've kind of look at it in terms of, is there impact to the budgets that then impacts the products that customers buy from us, I'd say that's a lot less than the case.</p><p><strong>Luke Larson</strong> -- <em>President</em></p> <p>Yeah. And I would just add another point there. I think if you look at our business, maybe, you know, 10 years ago or even eight years ago, we were really dependent on one core market, our domestic market with one core product. And today, we've got a lot of diversification, not only in our product lines, but also our geographical and even different market segments.</p> <p>And so, as we see some puts and takes in different segments or products, we are seeing the evidence with international and some of these early other segments, we still feel really confident there.</p><p><strong>Will Power</strong> -- <em>Robert W. Baird & Co. -- Analyst</em></p> <p>OK. No, that's good to hear. I guess, just as a quick follow-up question. Maybe circling back to international, given the strength you've had the last couple of quarters, any comments you can make with respect to pipeline from here? I'm guessing a lot of those deals you announced this quarter last when the pipeline prior to COVID, how much is COVID impacting your ability to sell there? And how does that -- what over the next several quarters?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Yeah. Thanks a lot. So there is going to be some lumpiness in international quarter to quarter. But on a year-by-year basis, we still expect very encouraging double-digit growth out of our international revenue.</p> <p>COVID, you know, it's impacted our ability to travel. But in most of our key markets now, we've got teams on the ground so it's not like folks are having to travel on planes region to region. We do have teams built out in a lot of key places and distributors supporting us in a lot of key places. So ultimately, the work that's gone into international started three,four years ago.</p> <p>And so, the things that are impacting the quarter-to-quarter results, these are things that teams have been working on for quarters and quarters already. So I would expect there's going to be some lumpiness in revenue quarter to quarter internationally. But I do have a lot of confidence that we're trending in a very, very strong direction, both in terms of bookings and revenue, internationally.</p><p><strong>Will Power</strong> -- <em>Robert W. Baird & Co. -- Analyst</em></p> <p>Great. Thank you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thank you. Will, we were admiring your collection of phones in the background there. We'll take our next question from Brian Gesuale at Raymond James. Go ahead, Brian.</p><p><strong>Brian Gesuale</strong> -- <em>Raymond James -- Analyst</em></p> <p>Thanks, Andrea. Just wanted to ask a question on the net retention rate, which was a really good metric of 119% of net dollars, can you maybe provide a little bit of color on how we might think of that between additional seats versus additional functionality that drives incremental ARPU? And how we might want to think about that mix as we move forward?</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. I'll -- I'll start with that one. So that's a metric that we wanted to introduce for some time now. It's something we've been tracking for a while and we felt confident that you have enough data and enough sort of a history there to be able to start to publish it, and we feel very confident that number will hopefully tick up over time.</p> <p>It's a dollar retention. It's not a user retention and so as our -- as we sign more OSP 7, 7+ contracts, which are, of course, at a much higher ARPU, that number will start to tick up. We, at this point, don't disclose ARPU because there's a lot of noise in that number, certainly, between domestic and international. But even within domestic, we have different customers at different stages so we're not yet ready to disclose the ARPU number.</p> <p>Does that help, Brian? Is that what you're looking for?</p><p><strong>Brian Gesuale</strong> -- <em>Raymond James -- Analyst</em></p> <p>Yeah. That's perfect. Maybe just to follow-up a little bit. I wanted to just kind of revisit the gross margin kind of assumption for the third quarter and I know you're not going beyond that.</p> <p>But how might we think about the duration of these headwinds that you mentioned? I'm sure they're not all on a similar rhythm, but how long do you think they lift over time?</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. Our expectation is that the one that we mentioned specifically for Q3 will be resolved within Q3. There may be a little bit of spillover into Q4, but it will be on the order of magnitude of a couple of weeks. It's not going to materially impact Q4.</p> <p>And so at this point, our best sort of -- sort of outlook there is that it's going to be resolved within Q3. And then, there are other -- I wouldn't necessarily call them a headwind, but we're still working very hard to get our gross margins up in the hardware business. That's something that, you know, obviously, the more software we bring online, that business is printing at 80%-plus gross margin. So as more of our business shift to software, our gross margins will lift there naturally.</p><p><strong>Brian Gesuale</strong> -- <em>Raymond James -- Analyst</em></p> <p>Thank you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>Thanks, Brian. Andrew Uerkwitz with Oppenheimer, we'll take your question next.</p><p><strong>Andrew Uerkwitz</strong> -- <em>Oppenheimer and Company -- Analyst</em></p> <p>Great. Thank you, guys. I appreciate the time. Could you help me understand that based on our research, many of your RMS wins are more similar to the module, similar to what I think Jeff mentioned with Baltimore with the use-of-force.</p> <p>I assume the expectation is this will lead to kind of a rip and replace for the entire system. So one, am I thinking about this correctly? And then two, how does the accounting and pricing work over the life of a contract for a city that goes this route? And then lastly, kind of in that context, you know, Baltimore signed an OSP 7 contract a year ago. And then, they just recently announced that RMS module. Does that contract get reset? Does it get extended when something like that happens? Or does ASP go up at that point? Could you talk a little bit about the accounting and dynamics of when that happens? Thank you.</p><p><strong>Luke Larson</strong> -- <em>President</em></p> <p>Sure. I'll lead up overall and then let the other guys chime in. So first, on the product point, we're -- like we said, we're seeing a great pipeline of both committed existing commitments, as well as, pipeline from here, both for full records deployment, meaning the full replace of their legacy RMS, as well as, Standard, which is that first module. And so for example, just Baltimore, since they've already made it public, that's a commitment to move to records in its entirety and to fully replace their legacy RMS and we're seeing -- we are ahead of our expectations on the pipeline there, as well as, of course, a larger number of the Standards ones.</p> <p>So we're seeing success on both. And again, ultimately, our goal, and we're confident of this outcome, is that we are ultimately going to be on track to become the No. 1 in this category for full records and Standards is just a great part of the path to get there because it's such an easy first step for a given agency to take. And then, I'll let Jawad give more color.</p> <p>But fundamentally, on the accounting, again, specifically with regard to OSB 7+, it is part of this overall primafit of the way the public safety buys this technology, where just like for a subscription service like that, where you are buying a thing that has many benefits to it. You are buying a thing that has many benefits to it regardless of whether and when you choose to adopt any given benefit.</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. And then as far as how the accounting works, the revenue recognition. So we allocate a portion of the overall bundle to records. And that portion we start recognizing once the customer has gone live and let me stop there.</p> <p>Is that what you're looking for?</p><p><strong>Andrew Uerkwitz</strong> -- <em>Oppenheimer and Company -- Analyst</em></p> <p>Yeah. I think so. And does the contract reset then? So like Baltimore signed for OSP 7s, were they paying $199 million a year ago? Or were they paying less than that? And then now that they're rolling out RMS, now they're moving up to that full price. And because they kick that in there, does that reset the contract where now it's five years from now as opposed to five years from a year ago?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>So there -- the price they paid last year is the same they paid this year with a couple of notable exceptions. The first of which is the professional services to deploy RMS is a separate contract. So once they're ready to deploy, they would pay us for the professional services. The second one is, they're going to add -- or they have added some more users because the OSP 7+ often covers sworn officers that are carrying body cam and TASERS.</p> <p>But ultimately, they're going to need more users to administer a lot of the elements of an RMS system and see that data and work with reports and so forth. So we do expect some user uptick as agencies start to deploy RMS. The third one is, in Baltimore's case, actually did extend their contract as well to co-term with some of their other items they have with us and I think they extended out a couple of years as part of that. So those are all dynamics that we expect to see.</p> <p>But I think the most important thing is we're betting on ourselves to be able to upsell additional new features outside of OSP 7+, two agencies that are deploying our RMS. So transcription is a great example of this and Baltimore paid us additional monies per user to deploy transcription as part of their RMS service. And so for us, I think we do envision some of these kind of value-added features on top of the OSP 7 deliverables as upsell opportunities as agencies deploy RMS.</p><p><strong>Andrew Uerkwitz</strong> -- <em>Oppenheimer and Company -- Analyst</em></p> <p>Got it. Thank you guys so much. I appreciate that color.</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Love the foosball table as well.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>All right. And we're going to go a little over. Thanks, guys for your patience. We'll take our next question.</p> <p>It might be our final question from Pavan Kumar from Northland.</p><p><strong>Unknown speaker</strong></p> <p>Hi, guys. Can you hear me?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Yes.</p><p><strong>Unknown speaker</strong></p> <p>We can hear you. Can't see you, but we can hear you.</p> <p>Yeah. I disabled my video because I was having some Internet connectivity issue. Thanks for taking my questions. Regarding R&D and SG&A spending as a percentage of revenue in second half in '21, which areas of products would get most focus?</p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah, I'll start with that. And Jeff, if you'd like to weigh in. So right now, the majority of our R&D is on -- is being spent on software. We're very excited about what we've got in the pipeline from a software standpoint.</p> <p>As you saw quarter over quarter, our SG&A was actually flat and our R&D grew, and that was very much by design. Our R&D growth -- well based revenue growth this year. But you know, at some point, we have long-term targets that we've set of 30% on EBITDA and the way that we're going to get there is by allowing more of the revenue growth to fall to the bottom line. But overall, the investments we're making in R&D, we think, are going to help pay off over a long horizon and get our -- keep our revenue growth rate above 20%.</p><p><strong>Unknown speaker</strong></p> <p>Great. Regarding competition, like who are the competitors we are seeing most on the Records deal?</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>Sorry, the question was Records competition if heard you?</p><p><strong>Unknown speaker</strong></p> <p>Yes, yes.</p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p> <p>OK. Yeah. I think there are some competitors that I was -- I would characterize as companies that have been in the records business for a long time. And a lot of them are incumbents and we have a lot of respect for those companies.</p> <p>We certainly believe kind of our new innovative approach to records will lead to customer adoption in times away from some of those products just like we saw in Baltimore, and there are new entrants to the space as well. And ultimately, like the combination of our channel coupled with the amount of investment and talent we're bringing on on the product side, we think that we're really well-positioned for the long term. I think for the newer competitors, certainly, they have more constraints around channel and spend than we might, and for some of the incumbent competitors, they probably have a little more constraint around servicing existing customers as opposed to really innovating quickly. And so, we view ourselves as a really disruptive entrant into this market and we're very hopeful that we can become the market leader in due time.</p><p><strong>Luke Larson</strong> -- <em>President</em></p> <p>Yeah, that's right. I mean I think, first, we always like to say that we obsess first and foremost, about our customers. We're happy to have our competitors obsessed about us, but we like to focus on the customer. But exactly, as Josh said, you know, overall, both the legacy providers, as well as, some of the new ones, Axon just has a pretty unique combination of assets that makes us different, both in the legacy incumbent and the newer start-ups.</p> <p>Because the legacy incumbents are simply not cloud-first and born-cloud and you fundamentally can deliver the kinds of results that the departments of today and tomorrow need without being born in the cloud. And on the other hand, the newer start-ups simply don't have the network of sensors and signals that are connected into services. That can also do the same thing. We're really the only company that has that combination of both, which is why we're so excited about where we're ultimately going to deliver for customers in this category.</p><p><strong>Unknown speaker</strong></p> <p>Great. Thank you.</p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p> <p>I think that's all of our questions. I'm just looking at all your screens here. OK, let's have Rick close this out.</p><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p> <p>All right. We're a little over. So let's keep it quick. Thank you, everybody, for joining us.</p> <p>We're confident. We'll all look back on 2020 is the time that set in motion the next wave of policing reform and the next leg of growth for Axon. We hope you stay safe, healthy, sane during this period of continued disruption, and we look forward to updating you on our progress against our mission in November. And don't forget to come to Axon Accelerate in a couple of weeks, and you'll see a lot more detail on our product road map.</p> <p>Thanks, and buh-bye.</p> <p><strong>Duration: 64 minutes</strong></p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-49100">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-49100');\n });\n </script>\n</div>\n</div><h2>Call participants:</h2><p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p><p><strong>Luke Larson</strong> -- <em>President</em></p><p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p><p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p><p><strong>James Faucette</strong> -- <em>Morgan Stanley -- Analyst</em></p><p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p><p><strong>Keith Housum</strong> -- <em>Northcoast Research -- Analyst</em></p><p><strong>Joe Osha</strong> -- <em>JMP Securities -- Analyst</em></p><p><strong>Scott Berg</strong> -- <em>Needham and Company -- Analyst</em></p><p><strong>Jeff Kunins</strong> -- <em>Chief Product Officer</em></p><p><strong>Charlie Anderson</strong> -- <em>Dougherty and Company -- Analyst</em></p><p><strong>Mark Strouse</strong> -- <em>J.P. Morgan -- Analyst</em></p><p><strong>Jeremy Hamblin</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p><p><strong>Jonathan Ho</strong> -- <em>William Blair and Company -- Analyst</em></p><p><strong>Will Power</strong> -- <em>Robert W. Baird & Co. -- Analyst</em></p><p><strong>Brian Gesuale</strong> -- <em>Raymond James -- Analyst</em></p><p><strong>Andrew Uerkwitz</strong> -- <em>Oppenheimer and Company -- Analyst</em></p><p><strong>Unknown speaker</strong></p>\n<p><a href="https://www.fool.com/quote/aaxn">More AAXN analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-83917", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAXN"], "primary_tickers_companies": ["Axon Enterprise"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Axon Enterprise (AAXN) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 55, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-83917"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-83917", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAXN"], "primary_tickers_companies": ["Axon Enterprise"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Axon Enterprise (AAXN) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 55, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], AAXN earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Axon Enterprise</strong> <span class="ticker" data-id="205639">(<a href="https://www.fool.com/quote/nasdaq/axon-enterprise/aaxn/">NASDAQ:AAXN</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 06, 2020</span>, <em id="time">5:00 p.m. ET</em></p>, <h2>Contents:</h2>, , <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul>, , <h2>Prepared Remarks:</h2>, , <br/>, , <p><strong>Operator</strong></p>, <p>Hello, everyone. Welcome to Axon's second-quarter 2020 earnings conference webinar. I'm Andrea James, SVP of corporate strategy and investor relations. Thank you for joining us over Zoom.</p>, , <p>We do appreciate that today is a particularly crowded earnings day and our thoughts are with those of you who are dealing with the tropical storm. Today, we have available Axon's CEO, Rick Smith; President Luke Larson, CFO Jawad Ahsan, Chief Revenue Officer Josh Isner, and Chief Product Officer Jeff Kunins. We feel great bringing you guys the whole team. First, we're going to give prepared remarks, and then, we'll bring our analysts on camera for questions.</p>, , <p>[Operator instructions] I hope everyone has had a chance to read the shareholder letter, which we released after the market closed. You can find it investor.axon.com. Our remarks today are meant to build upon the information in that letter, which is very robust. If for some reason, there's an Internet outage beyond our control or we lose Zoom connectivity, we'll make every effort to post a copy of our prepared remarks to investor.axon.com this evening.</p>, , <p>During this call, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today, are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.</p>, , <p>These risks are discussed in our SEC filings. OK. Please go ahead, Rick.</p>, <p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p>, , <p>Thank you, Andrea, and thank you, everyone, for joining us today. During our last quarterly update in May, one of the biggest issues we addressed was how we were managing our business through a pandemic. One quarter later, we have so much more to talk about because we've all watched thousands of people take to the street demanding -- holdings in public safety reform. Our company's reason to exist, our mission is for exactly moments like right now.</p>, , <p>Protect life, we are on a mission to make energy weapons so safe and so effective that we make bullets obsolete. We preserve truth. Body cameras protect officers to bad claims and citizens from bad behavior, increasing transparency and reducing social conflict. We accelerate justice with advanced cloud software and AI that have potential to make the entire justice system more fair and more effective.</p>, <p></p>, <div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Axon Enterprise</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAxon%2520Enterprise%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=65a645d5-8458-473c-b6fc-563f39678cb0">ten best stocks</a></strong> for investors to buy right now… and Axon Enterprise wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAxon%2520Enterprise%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=65a645d5-8458-473c-b6fc-563f39678cb0" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>, <p>When you think of gun bans, social conflicts, an unfair justice system, most people don't think of these as technology problems, but it's political problems. We frame them there's problems where technology can play a transformative role. Now technology is no panacea yet and it cannot solve these problems for us. However, almost any problem can be solved faster and more effectively with the right technology tools to help people solve them.</p>, , <p>So as we look at all the pain and anger today, we ask ourselves what can we do to help promote equity. Our super power is creating technology to address social problems that many others see as intractable. So we've added a fourth mission to inspire our work. Centering racial equity, inclusion, and diversity, which might make you wonder how can you build technology to promote equity? If you want to hear specific examples of how we are using technology to support this new mission, you'll have to wait and come join us at our conference Accelerate later this month.</p>, , <p>We've made Axon can't change the policies and cultural norms in policing, but we can build the tech tools to help our customers do it. We're hearing consistent and emphatic calls for change from the most prominent leaders of law enforcement and we are excited to build the tools to help them. Back when we began investing in body cameras in 2008, we faced innumerable skeptics, but we knew that body cameras were the future. And body cameras started to gain traction after a wave of protests began in Ferguson, Missouri in 2014, which was really the birth of the Black Lives Matter movement.</p>, , <p>At the time, we were delivering the right capabilities at the right time and our investments in cloud software made body cameras suddenly feasible and affordable for all agencies. We invested in body cameras when nobody believed they were possible, and as the investment community well knows, our core body camera and software business lost money from 2008 to 2019 when it began to turn to profit. Those 11 years of continuous investment in R&D to prove that the feasibility and sustainability of body cameras are now the foundation for our next leg of growth. In 2020, we're humbled to be developing solutions that once again find themselves relevant to a national conversation about policing.</p>, , <p>We do not shy away from these hard discussions and we see the pain and the nuance behind demands to define police. This is really all about reforming and reshaping the justice system and these are issues that we engage with daily. They're not new to us. We invite input from a broad spectrum of voices.</p>, , <p>We have the industry's most relevant and productive ethics board. With renewed calls from reform, we can leverage technology and policy changes to improve public safety. We believe that our product moment fit is why our pipeline continues to strengthen as communities see the power of our platform to drive positive change. And now with that, I'm going to turn it over to our president, Luke Larson. </p>, <p><strong>Luke Larson</strong> -- <em>President</em></p>, , <p>Thanks, Rick. In a few weeks, on August 25th, as Rick mentioned, we'll be hosting our annual technology summit Axon Accelerate. Due to COVID, we've shifted this to a virtual event, which has allowed us to grow the event to reach a much bigger scale of our audience and customers. We're also able to offer a cutting-edge virtual reality track.</p>, , <p>If you'd like to attend, go to axon.com and register. We're very excited to share some key customer updates and product announcements on how Axon can help officers and the communities they serve ensure everyone makes it home safe. Our strategic priorities in 2020 are to continue to execute in our core market while accelerating our path to market in new product categories. Our engineering and product teams are solving some of the most difficult problems at the intersection of the physical and digital worlds to advance our mission.</p>, , <p>This is also a year where we have walked beside our customers in one of the most challenging environments they have ever faced. Our customer-facing teams have built amazing relationships with our customers, not by selling devices or software. But by becoming trusted advisors on how we can help customers with the important problems they are facing. We are helping them to source mission-critical technology amid greater public budget scrutiny helping them to access federal dollars where available and we aspire to be true partners to our customers.</p>, , <p>We are emphasizing the mission-critical importance of our OSP 7+ offering, de-escalation, transparency, and productivity have never been more critical to police and community relations during this watershed moment and our offerings address these exact situations. This emphasis drove our Q2 results with revenue up 26% year over year. This is a strong performance in the context of one of the toughest macros we've faced, a global pandemic and massive economic uncertainty. Our strong results were also driven by a stellar quarter for international, up 80% year over year to $34 million.</p>, , <p>This was on top of 38% international revenue growth in Q1. We are just getting started in large markets such as Brazil and India and three countries topped $1 million in revenue for the first time in the quarter; Indonesia, Panama, and Thailand. Turning to the bottom line. GAAP income was affected by stock-based compensation and tax expense.</p>, , <p>Adjusted EBITDA was $28 million, reflecting a 20% margin, which showcases our cost discipline and some travel savings related to COVID. Turning to operations. You will see the inventory build on our balance sheet. This was very intentional.</p>, , <p>We have adopted well -- we have adapted to an ongoing supply chain environment that we've never seen. Recall that last year, we diversified our supply chain and global manufacturing footprint due to tariffs and it turns out that those initiatives positioned us well to handle COVID-19. Even so, given the number of unforeseen challenges that could lay ahead and the fact that 2020 is full of curve balls, we've elevated our inventory build in the first half. This safety stock helps minimize shipping disruptions and also prepares us for some key Axon Body 3 shipments to major customers in Q3 and taser orders we are expected to fulfill in the back half of the year.</p>, , <p>Currently, we expect Q3 inventory levels to remain about the same. And by the end of the year, they could come down by as much as 10%. And with that, I'll turn it over to our chief financial officer, Jawad.</p>, <p><strong>Jawad Ahsan</strong> -- <em>Chief Financial Officer</em></p>, , <p>Thanks, Luke. Our second-quarter performance was a testament to our ability to deliver sharp execution in a challenging environment. Although demand remained robust, domestic customers were often baned with constraint, dealing with COVID-19, personnel outages, employee safety concerns, and caution about uncertain budgets. Even with these challenges, Q2 revenue was generally in line with our pre-pandemic expectations.</p>, , <p>Domestic body camera bookings remained strong and our international expansion continues to accelerate. Our results in the quarter speak to our resilience as a company and the critical importance of our products and our customers' lives. A few years ago, we set out on a journey to transform into an enterprise software company that also sells devices and our performance this past quarter further solidifies that path. High-margin annual recurring revenue grew 42% to $183 million.</p>, , <p>Software revenue was a record 30% of total sales and we sustained a SaaS net revenue retention of 119%. Turning to our -- our outlook. We're watching to see whether states shut down in the fall, which could bring renewed caution on budgeting. There is just enough outside of our control regarding COVID-19 that we did not reinstate formal full-year guidance.</p>, , <p>We did provide a range that we are managing toward for Q3. There are two factors to keep in mind when considering our interim Q3 guidance. The first is that we made a strategic and intentional decision to prioritize growing our cloud user base and adding nodes to our network in the early days of our software and sensors business. As a result, we have contracts with strategically important agencies, both domestically and internationally, that have served as beachhead accounts, but come with a lower margin than average.</p>, , <p>The second factor is that the majority of our multi-year contracts come with hardware refreshes at periodic intervals, which come at a lower margin than the SaaS portion of these contracts. The confluence of these two factors will conspire in Q3 to be a headwind on our gross margins, which we expect will normalize by Q4. Anticipating a question we often receive these days. We are not seeing changes in buying activity due to police defunding concerns.</p>, , <p>In fact, we've seen some anecdotal acceleration of body camera buying decisions due to agencies wishing to provide transparency to their communities. We remain confident in our long-term multi-year outlook. We're privileged to be working on solutions to some of society's most entrenched challenges. We are just getting started in several new markets internationally and in several new software product lines.</p>, , <p>Importantly, the addition of capital from our recent follow-on offering, further strengthen our balance sheet, and provides us with even greater flexibility to continue investing for growth. At quarter end, we had $675 million of cash and investments and zero debt. Before we move to Q&A, I'd like to share some insight with you as to how we view the company relative to the investments we're making and where we're headed. The first phase of the company's growth, let's call it, Axon 1.0, saw us establishing the taser business and building an unparalleled sales channel with law enforcement.</p>, , <p>The second phase of our growth, Axon 2.0 saw us continuing to innovate with the introduction of smart devices, including body-worn and in-car cameras, which integrated seamlessly with our customer-focused cloud network. Now, we're entering the next phase of our growth, Axon 3.0, we're building a rapidly evolving public safety ecosystem with both connected devices in intuitive workflows powered by AI with the increasingly powerful Axon Cloud as our centerpiece. Our mission with this ecosystem is to protect life, capture truth, and accelerate justice. Now more than ever, society is driving toward these outcomes and Axon is uniquely positioned to partner with our customers and deliver on all three.</p>, , <p>And with that, Andrea, let's move to questions.</p>, <p><strong>Andrea James</strong> -- <em>Senior Vice President of Corporate Strategy and Investor Relations</em></p>, , <p>Thank you, Jawad and team. Thanks so much. Moderators, can we bring everyone up into gallery view? OK. Thank you.</p>, , <p>We'll take our first question from James Faucette with Morgan Stanley. Go ahead, James.</p>, <p><strong>James Faucette</strong> -- <em>Morgan Stanley -- Analyst</em></p>, , <p>Great. Thank you very much. I wanted to ask the team, Rick, Luke. Obviously, there's a lot of pressure on police departments, that at the very least, to improve efficiencies, etc.</p>, , <p>Where are we now in terms of some of the software products like records, dispatch, etc. to really effectively reduce time that officers have to spend on paperwork, etc. And so, they can spend more time in the field and gain efficiencies that way? And how well are you being able to communicate the current capabilities to the customers?</p>, <p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p>, , <p>Well, I would say the best answer to that question will be if you tune in to Accelerate. We have some pretty significant new announcements and we'll be showcasing some new capabilities that will have a big impact on efficiency. One of which, we've been in field trials that will go -- it's going into full release. And I can tell you that one agency in Canada was testing one of those capabilities said it was absolutely transformative.</p>, , <p>They had two homicides happen in a short period of time, and for a small agency, this created tremendous -- tremendous levels of workload. And one of our new AI products actually help them handle two simultaneously. That they said without us, they would have been at risk actually potentially having those cases at risk of getting this qualified because they would not have been able to process all the paperwork and the interior data to meet the judicial deadlines. So stay tuned to Accelerate for more, but both records and dispatch are live in the field.</p>, , <p>And we're now beginning to start really linking some of the AI capabilities to power the creation of the structured data in those systems from the unstructured data we capture with our body cameras.</p>, <p><strong>James Faucette</strong> -- <em>Morgan Stanley -- Analyst</em></p>, , <p>Got it. And then as a follow-up, you mentioned Canada, but it was interesting, at least to us, to see the big jump in international revenue. Where are you and how should we be thinking about the ability that you have in other international markets to take the success of taser and take it over to body cameras and some of the other software products in those markets?</p>, <p><strong>Rick Smith</strong> -- <em>Chief Executive Officer</em></p>, , <p>Josh, why don't you start answering that as the head of sales?</p>, <p><strong>Josh Isner</strong> -- <em>Chief Revenue Officer -- Analyst</em></p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-83917", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAXN"], "primary_tickers_companies": ["Axon Enterprise"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Axon Enterprise (AAXN) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 55, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-83917"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-83917", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["AAXN"], "primary_tickers_companies": ["Axon Enterprise"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Axon Enterprise (AAXN) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 55, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | AAXN earnings call for the period ending June 30, 2020. | Hello, everyone. Welcome to Axon's second-quarter 2020 earnings conference webinar. I'm Andrea James, SVP of corporate strategy and investor relations. Thank you for joining us over Zoom.\n We do appreciate that today is a particularly crowded earnings day and our thoughts are with those of you who are dealing with the tropical storm. Today, we have available Axon's CEO, Rick Smith; President Luke Larson, CFO Jawad Ahsan, Chief Revenue Officer Josh Isner, and Chief Product Officer Jeff Kunins. We feel great bringing you guys the whole team. First, we're going to give prepared remarks, and then, we'll bring our analysts on camera for questions.\n [Operator instructions] I hope everyone has had a chance to read the shareholder letter, which we released after the market closed. You can find it investor.axon.com. Our remarks today are meant to build upon the information in that letter, which is very robust. If for some reason, there's an Internet outage beyond our control or we lose Zoom connectivity, we'll make every effort to post a copy of our prepared remarks to investor.axon.com this evening.\n During this call, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today, are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.\n These risks are discussed in our SEC filings. OK. Please go ahead, Rick.\n Thank you, Andrea, and thank you, everyone, for joining us today. During our last quarterly update in May, one of the biggest issues we addressed was how we were managing our business through a pandemic. One quarter later, we have so much more to talk about because we've all watched thousands of people take to the street demanding -- holdings in public safety reform. Our company's reason to exist, our mission is for exactly moments like right now.\n Protect life, we are on a mission to make energy weapons so safe and so effective that we make bullets obsolete. We preserve truth. Body cameras protect officers to bad claims and citizens from bad behavior, increasing transparency and reducing social conflict. We accelerate justice with advanced cloud software and AI that have potential to make the entire justice system more fair and more effective.\n When you think of gun bans, social conflicts, an unfair justice system, most people don't think of these as technology problems, but it's political problems. We frame them there's problems where technology can play a transformative role. Now technology is no panacea yet and it cannot solve these problems for us. However, almost any problem can be solved faster and more effectively with the right technology tools to help people solve them.\n So as we look at all the pain and anger today, we ask ourselves what can we do to help promote equity. Our super power is creating technology to address social problems that many others see as intractable. So we've added a fourth mission to inspire our work. Centering racial equity, inclusion, and diversity, which might make you wonder how can you build technology to promote equity? If you want to hear specific examples of how we are using technology to support this new mission, you'll have to wait and come join us at our conference Accelerate later this month.\n We've made Axon can't change the policies and cultural norms in policing, but we can build the tech tools to help our customers do it. We're hearing consistent and emphatic calls for change from the most prominent leaders of law enforcement and we are excited to build the tools to help them. Back when we began investing in body cameras in 2008, we faced innumerable skeptics, but we knew that body cameras were the future. And body cameras started to gain traction after a wave of protests began in Ferguson, Missouri in 2014, which was really the birth of the Black Lives Matter movement.\n At the time, we were delivering the right capabilities at the right time and our investments in cloud software made body cameras suddenly feasible and affordable for all agencies. We invested in body cameras when nobody believed they were possible, and as the investment community well knows, our core body camera and software business lost money from 2008 to 2019 when it began to turn to profit. Those 11 years of continuous investment in R&D to prove that the feasibility and sustainability of body cameras are now the foundation for our next leg of growth. In 2020, we're humbled to be developing solutions that once again find themselves relevant to a national conversation about policing.\n We do not shy away from these hard discussions and we see the pain and the nuance behind demands to define police. This is really all about reforming and reshaping the justice system and these are issues that we engage with daily. They're not new to us. We invite input from a broad spectrum of voices.\n Thanks, Rick. In a few weeks, on August 25th, as Rick mentioned, we'll be hosting our annual technology summit Axon Accelerate. Due to COVID, we've shifted this to a virtual event, which has allowed us to grow the event to reach a much bigger scale of our audience and customers. We're also able to offer a cutting-edge virtual reality track.\n If you'd like to attend, go to axon.com and register. We're very excited to share some key customer updates and product announcements on how Axon can help officers and the communities they serve ensure everyone makes it home safe. Our strategic priorities in 2020 are to continue to execute in our core market while accelerating our path to market in new product categories. Our engineering and product teams are solving some of the most difficult problems at the intersection of the physical and digital worlds to advance our mission.\n This is also a year where we have walked beside our customers in one of the most challenging environments they have ever faced. Our customer-facing teams have built amazing relationships with our customers, not by selling devices or software. But by becoming trusted advisors on how we can help customers with the important problems they are facing. We are helping them to source mission-critical technology amid greater public budget scrutiny helping them to access federal dollars where available and we aspire to be true partners to our customers.\n We are emphasizing the mission-critical importance of our OSP 7+ offering, de-escalation, transparency, and productivity have never been more critical to police and community relations during this watershed moment and our offerings address these exact situations. This emphasis drove our Q2 results with revenue up 26% year over year. This is a strong performance in the context of one of the toughest macros we've faced, a global pandemic and massive economic uncertainty. Our strong results were also driven by a stellar quarter for international, up 80% year over year to $34 million.\n This was on top of 38% international revenue growth in Q1. We are just getting started in large markets such as Brazil and India and three countries topped $1 million in revenue for the first time in the quarter; Indonesia, Panama, and Thailand. Turning to the bottom line. GAAP income was affected by stock-based compensation and tax expense.\n Adjusted EBITDA was $28 million, reflecting a 20% margin, which showcases our cost discipline and some travel savings related to COVID. Turning to operations. You will see the inventory build on our balance sheet. This was very intentional.\n We have adopted well -- we have adapted to an ongoing supply chain environment that we've never seen. Recall that last year, we diversified our supply chain and global manufacturing footprint due to tariffs and it turns out that those initiatives positioned us well to handle COVID-19. Even so, given the number of unforeseen challenges that could lay ahead and the fact that 2020 is full of curve balls, we've elevated our inventory build in the first half. This safety stock helps minimize shipping disruptions and also prepares us for some key Axon Body 3 shipments to major customers in Q3 and taser orders we are expected to fulfill in the back half of the year.\n Currently, we expect Q3 inventory levels to remain about the same. And by the end of the year, they could come down by as much as 10%. And with that, I'll turn it over to our chief financial officer, Jawad.\n Thanks, Luke. Our second-quarter performance was a testament to our ability to deliver sharp execution in a challenging environment. Although demand remained robust, domestic customers were often baned with constraint, dealing with COVID-19, personnel outages, employee safety concerns, and caution about uncertain budgets. Even with these challenges, Q2 revenue was generally in line with our pre-pandemic expectations.\n Domestic body camera bookings remained strong and our international expansion continues to accelerate. Our results in the quarter speak to our resilience as a company and the critical importance of our products and our customers' lives. A few years ago, we set out on a journey to transform into an enterprise software company that also sells devices and our performance this past quarter further solidifies that path. High-margin annual recurring revenue grew 42% to $183 million.\n Software revenue was a record 30% of total sales and we sustained a SaaS net revenue retention of 119%. Turning to our -- our outlook. We're watching to see whether states shut down in the fall, which could bring renewed caution on budgeting. There is just enough outside of our control regarding COVID-19 that we did not reinstate formal full-year guidance.\n We did provide a range that we are managing toward for Q3. There are two factors to keep in mind when considering our interim Q3 guidance. The first is that we made a strategic and intentional decision to prioritize growing our cloud user base and adding nodes to our network in the early days of our software and sensors business. As a result, we have contracts with strategically important agencies, both domestically and internationally, that have served as beachhead accounts, but come with a lower margin than average.\n The second factor is that the majority of our multi-year contracts come with hardware refreshes at periodic intervals, which come at a lower margin than the SaaS portion of these contracts. The confluence of these two factors will conspire in Q3 to be a headwind on our gross margins, which we expect will normalize by Q4. Anticipating a question we often receive these days. We are not seeing changes in buying activity due to police defunding concerns.\n In fact, we've seen some anecdotal acceleration of body camera buying decisions due to agencies wishing to provide transparency to their communities. We remain confident in our long-term multi-year outlook. We're privileged to be working on solutions to some of society's most entrenched challenges. We are just getting started in several new markets internationally and in several new software product lines.\n Importantly, the addition of capital from our recent follow-on offering, further strengthen our balance sheet, and provides us with even greater flexibility to continue investing for growth. At quarter end, we had $675 million of cash and investments and zero debt. Before we move to Q&A, I'd like to share some insight with you as to how we view the company relative to the investments we're making and where we're headed. The first phase of the company's growth, let's call it, Axon 1.0, saw us establishing the taser business and building an unparalleled sales channel with law enforcement.\n The second phase of our growth, Axon 2.0 saw us continuing to innovate with the introduction of smart devices, including body-worn and in-car cameras, which integrated seamlessly with our customer-focused cloud network. Now, we're entering the next phase of our growth, Axon 3.0, we're building a rapidly evolving public safety ecosystem with both connected devices in intuitive workflows powered by AI with the increasingly powerful Axon Cloud as our centerpiece. Our mission with this ecosystem is to protect life, capture truth, and accelerate justice. Now more than ever, society is driving toward these outcomes and Axon is uniquely positioned to partner with our customers and deliver on all three.\n And with that, Andrea, let's move to questions.\n Thank you, Jawad and team. Thanks so much. Moderators, can we bring everyone up into gallery view? OK. Thank you.\n We'll take our first question from James Faucette with Morgan Stanley. Go ahead, James.\n Great. Thank you very much. I wanted to ask the team, Rick, Luke. Obviously, there's a lot of pressure on police departments, that at the very least, to improve efficiencies, etc.\n Where are we now in terms of some of the software products like records, dispatch, etc. to really effectively reduce time that officers have to spend on paperwork, etc. And so, they can spend more time in the field and gain efficiencies that way? And how well are you being able to communicate the current capabilities to the customers?\n Well, I would say the best answer to that question will be if you tune in to Accelerate. We have some pretty significant new announcements and we'll be showcasing some new capabilities that will have a big impact on efficiency. One of which, we've been in field trials that will go -- it's going into full release. And I can tell you that one agency in Canada was testing one of those capabilities said it was absolutely transformative.\n They had two homicides happen in a short period of time, and for a small agency, this created tremendous -- tremendous levels of workload. And one of our new AI products actually help them handle two simultaneously. That they said without us, they would have been at risk actually potentially having those cases at risk of getting this qualified because they would not have been able to process all the paperwork and the interior data to meet the judicial deadlines. So stay tuned to Accelerate for more, but both records and dispatch are live in the field.\n And we're now beginning to start really linking some of the AI capabilities to power the creation of the structured data in those systems from the unstructured data we capture with our body cameras.\n Got it. And then as a follow-up, you mentioned Canada, but it was interesting, at least to us, to see the big jump in international revenue. Where are you and how should we be thinking about the ability that you have in other international markets to take the success of taser and take it over to body cameras and some of the other software products in those markets?\n Josh, why don't you start answering that as the head of sales?\n Yeah. Thanks very much, James, for the question. Ultimately, I think we see a lot of similarities regarding where international is now versus where domestic was four or five years ago, and we're very much following the same playbook. We're going to be focused on fewer markets than the entire world and we're going to continue to build out a few markets at a time over the next few years.\n I think the investments we made in our Tier 1 markets a couple of years ago, building really talented teams there, focusing on expanding both taser, and getting our early body camera and DEMS customers there are why you're starting to see the revenue results now. And as we continue to build bookings up internationally, we expect revenue to follow in future years. So our focus is to build very, very talented teams in the markets that we see as potential movers, and we'll start to introduce some of our newer products into those markets that are already showing great results. And as more and more markets kind of come up to speed, we'll introduce our newer and newer products as those markets become larger markets and deployments of body cameras and TASERS.\n Thanks, James. We'll take the next question from Keith Housum at Northcoast. Go ahead, Keith.\n Thanks. Good afternoon, guys. Rick, in terms of the budget relief, which the government is considering, is there any impact to your guidance if budget relief is offered to the state and local agencies over the next several months?\n Yeah. I think it'd just be pretty speculative for us to speculate on what might go in there. Obviously, if there's a lot of money, specifically, earmarked to state and local agencies. We suspect in this environment that it would end up being focused toward a lot of the transparency tools, things we're doing with body cameras, etc.\n We've also seen a lot of interest in corrections growing around the TASER weapons because COVID-19 still remains a big issue, and particularly, in combined environments. So there is more focus on maintaining safe distances, you know, traditionally in corrections, if you have an inmate that decides that they're going to become resistant to following the procedures they have to, that has meant correctional officers suiting up and having to go hands on in a very close personal -- you're -- you know, covered in each other's sweat and other things you really worry about. So we're -- our plan does not account for any additional federal funding. If it comes in, I think there could be a little bit of upside, but I wouldn't -- I don't want to speculate too much.\n Fair enough. Jawad, just a little bit of housekeeping here. In terms of the EBITDA margins for the next quarter, what's the impact of your large contracts on your EBITDA margins?\n Yeah. That was part of what we signaled with our Q3 guidance, Keith. We have some large international customers. We have a couple of international -- sorry, domestic customers that have -- we consider to be strategic beachhead accounts where their margins are lower on the camera contracts.\n And as those customers get the refreshes on their contracts in the quarters that we ship, which Q3 happens to be one we're going to see lower margins, which is why we gave that specific guidance for Q3.\n Right. But would it be fair to say the impact of those large shipments is going to be 2% on EBITDA margins. Is that fair assumption?\n Well, it's -- we are anticipating the EBITDA margins to be 12% on our Q3 revenues. We don't have formal guidance for the year. So I can't officially say what that impact is going to be.\n All right. Fair enough. Thank you.\n Yeah, Keith. And if you dive into the segment commentary in the shareholder letter, we're even more specific on the gross margin thoughts by segment.\n Great. Thank you.\n Uh-huh. We'll take our next question from Joe Osha with JMP. Go ahead, Joe.\n Hi, thank you for taking my question. One of the questions that's come up around this notion of police funding is the idea that some functions might be taken over by non-sworn officers. I'm wondering about how Axon sees the opportunity to address those types of uh -- those types of people? Thank you.\n Yeah. Let me take that one on. So first of all, I had a really interesting call with a major city Police Chief where we were talking about the defunding phenomenon and what happened. And what he related to me was actually -- they did reassign portions of its budget to other portions of the city.\n So basically, they just shifted some resources out of police to other city agencies. And then, its net budget was actually increased fairly significantly for body cameras and transparency tools. So in that respect, he was pleasantly surprised that the whole defunding discussion actually led for their agency to a better place, allow them to focus in on their core mission a bit more, reliance on partner agencies within the city to take a little more of the load, and it ultimately gave them a little more budget for tech. Now ultimately, you know, we'll see how this plays out in other agencies, but we believe that this idea that right now law enforcement, they're doing a lot of social services.\n They're dealing with homeless people and mental health issues because you pick up the phone and you dial 911 for a lot of things that maybe don't need a cop. And so, as we think about our dispatch software, what a great time to be introducing a new cloud-based dispatch capability where we can, obviously, shift our road map and be looking at introducing new features. Things would allow agencies to perhaps integrate better with other city agencies that might not traditionally need dispatch or [Inaudible] type roads to use some of our communication tools in ways that would allow the dispatchers to dispatch non-sworn officers to different types of events. So we -- we tend to love change as an organization and times are changing rapidly here.\n And we view that our DNA sets us up well to move quickly to new opportunities.\n That's right. And Joe, I think how we talked about when we last spoke, about when you think about something like dispatch and you think about something like Axon Aware and building geolocation and live streaming into our cameras, really being part of a bigger mission for agencies around real-time operations and broadening that lens. This is exactly the perfect scenario for which that is purpose built. And so even right out of the box, the integration of Axon Dispatch and Axon Aware, bringing together the ability to bring other kinds of resources into an incident in real-time is a capability that is just native to our cloud-born approach to all of these categories.\n Thank you. And just following on that, if I may. Is it possible perhaps that we might see an opportunity to deploy Axon Body alongside some of this new dispatch technology with non-sworn community officers or whatever we're going to call them?\n Absolutely. You now, we're seeing also, not only the ability for non-sworn officers to be able to use cameras. But for sworn officers, be able to live stream with folks like mental health experts that can be helping them in real time, dealing with complex situations where those officers might need more expertise. But we actually think this could open up some litigation areas, particularly, if you have unarmed, non-sworn people, your ability to identify emerging dangers becomes even more important because you have to rapidly route armed officers to the scene to help out.\n Thank you.\n Great. Thanks so much, Joe. We'll take our next question from Scott Berg at Needham. Go ahead, Scott.\n Hey, everyone, congrats on a great quarter. Thanks for taking a couple of questions here. I guess, first, I don't know if this is a question for Luke or for Rick. But Rick, in your newsletter, you talked about OSP pipelines in particular very strong, including the components for RMS? Now you just signed a really large contract with Baltimore that includes records.\n But I guess, what are you seeing on the records level out there, maybe from a demand perspective that would suggest those OSP 7 contracts with records will actually be implemented and utilized? Because that seems early given the commentary, but obviously, great if that's the case.\n I'll take that.\n Or Jeff if you want to start off.\n Yeah. I'll go ahead and take that. So I love that question. And so again, like we talked about last quarter, we're thrilled that well more than a dozen agencies are already live signed or being actively deployed on records, you know, using one or more modules of the product, and we're incredibly confident of the trajectory.\n As you've seen with the Baltimore announcement, both committed adoptions among OSP customers, as well as, continued interest in the pipeline beyond that, continue to accelerate well ahead of even our expectations. And I think the two key things at play there, like we talked about before, the first is the power of the bundle makes it an easy choice for them to take advantage of that benefit at a perceived value point that goes -- that goes hand-in-hand with what they're already paying for because it's effectively -- it's already included with the money that we've already committed to. And then second, is this key notion that we've talked about at Axon Standards, which is this use-of-force reporting module. And what's beautiful about Standards is that it just so happens in Records that every agency has to do use-of-force reporting, but they typically use a third-party module for it.\n They don't actually use their historical RMS. But because Standards is built right into Axon Records, it's the perfect first experience that they can use it as an and rather than an or with their legacy RMS to begin getting value out of it right away with incredibly easy deployment. And then from there, decide when they're ready to migrate their entire RMS. And that's exactly what happened with Cincinnati and we're seeing that same pattern play out as we go forward because it's incredibly easy to deploy, it works side-by-side with what they've already got.\n And then as they come to love it, whenever they're ready, they can quickly decide to adopt full Records for their entire RMS needs.\n Yeah. And specifically on the pipeline, I would say, you know, we are seeing more and more agencies interested in OSP 7+ and we're seeing some acceleration from the agencies that bought OSP 7+ last year in adopting our Standards module of records, as well as, a lot of the other key modules like reporting and so forth. So I'm very confident in our team to be able to convert some of those OSP 7+ opportunities into RMS deployments. We're very focused on and we're very focused on making sure that our customers are valuing and adopting all of the benefits in OSP 7+.\n And this is a place where I think, certainly, the combination of having a very, very strong product organization with a very, very strong channel should lead to outsized results down the road.\n Super helpful. Thanks, guys. Then, I guess, just as a quick follow-up, Jawad. The company has posted four straight quarters of greater than 25% revenue growth, which is a nice acceleration from the 12-month period before that.\n Your guidance calls for 15% revenue growth in the third quarter. Is that just some being conservative in the current lights and macroenvironment? Or are you seeing anything else that's maybe tempering that guidance just a little bit? Thank you.\n Yeah. I'll tag team. This is Josh with you, if that's all right. But we have a plan -- an operating plan for the year that had informed our guidance, and that's still pretty much informed as what we're managing to.\n We outperformed in Q1 and Q2. We were very happy with the performance of our business and our sales team. The investments we've been making in international has been really paying off. Some of these new markets, new products, but we don't, obviously, bank on that.\n And so, we feel it's prudent to stick relatively close to what our operating plan is, which is inform the 15% guidance.\n Yeah. Ultimately, there are going to be some quarters that have higher revenue growth rates than others and we feel good about full year. We feel good about kind of our long-term trajectory. But we do view this year as being back-half weighted compared to the front half, and it just might be an issue between what comes in, in Q3 and what comes in, in Q4 of our kind of large CW deal pipeline.\n Thanks, Team. And also in the back half, just on a comparables, the percentages are lower, but the nominal dollar's much higher is what Josh means on that. Thanks, Scott, for your questions. OK, we'll turn to Charlie Anderson at Dougherty.\n Go ahead, Charlie.\n Thanks. So I wanted to ask about bookings. It was very interesting to see the the bookings transit very much reflects what we're seeing in the business in terms of international, strong, domestic, not as strong. I wonder, is that just a snapshot in time where, is that the way we should think about the trajectory of the business in terms of international continuing to put up the big performance in domestic, maybe trailing the performance on a year-over-year basis? And then secondly, you made a comment on bookings about the first few weeks of the quarter better than April.\n I wonder if you could just layer in some context in terms of what that means from your standpoint and what's going on there? I got a follow-up.\n Yeah. Thanks, Charlie. We've got a lot of domestic sales people and leaders on the call here that hopefully are motivated by that question and we certainly expect a great back half from our domestic and international teams. I think there was -- if you look back at it, we lost about half the Q2 due to the pandemic shutdown.\n Everyone was trying to figure out how to conduct like City Council meetings and really conduct business on Zoom for the first time and that certainly slowed down some of our momentum in the first half of Q2. And then really in June, we lost about two weeks due to the kind of civil unrest and the events that followed the killing of George Floyd. So you know, I would look at Q2 more as just kind of a unique point in time due to some external factors that slowed us down a little domestically, but we have high expectations of our team and they're very motivated to turn that trend around in Q2 -- or I'm sorry, in Q2 -- or in Q3, both domestically and internationally.\n OK. Great. And then a question about the fleet product. You were -- there were some points in the shareholder letter about the importance of that product in the back half.\n So I wonder, we can see what the run rate has been in the past few quarters of the existing product. I'm curious if you can maybe help us with expectations for how much of a contributor that is? Does it lift to a meaningfully higher level than we've seen historically? Just any context around that launch would be helpful. Thanks.\n So I think from a bookings perspective, we do expect Fleet 3 to be a contributor in the back half of the year. I think there's still some question about shipping Fleet 3 and shipments, depending on how well the T&Es go, might end up in the front half of 2021, as opposed to the back half of 2020. We don't expect that to have much of an impact on revenue and bookings, like I said, given the fact that we'll be doing T&Es. It will contribute to bookings and we feel great about -- Fleet 2 has really stabilized in the last couple of quarters in terms of customer satisfaction and so forth.\n And we're excited to build on that momentum as we launch Fleet 3, certainly, the ALPR and modular capabilities of Fleet 3, where we can do 360-degree recording around the car and so forth are things our customers are excited about. And we absolutely are confident that we're going to get a great customer reaction from this product and be followed by bookings and revenue associated with it.\n And just to add one clarifying comment there. So we're going to be in some pretty in-depth trials in the back half of this year, but we don't expect to be in full production ramp of Fleet 3 until 2021 and that's where we'll see the real growth contribution.\n And the key, you know, Josh mentioned this with Fleet 3, in addition to it being our best ever in-vehicle camera system, straight-up its a camera system that will also be the launch, as we've said before, of our approach are pretty disruptive and novel approach to the automatic license plate recognition. Category and mobile, where fundamentally -- it's different than the way it's done today in the market by being disruptively more affordable and better, more cost-effective for better performance and results, by making it a thing that departments can put in every single police vehicle as opposed to a small number of very expensive purpose-built cameras. And of course, no matter how good any one camera is that can only be in one place. And then, you combine that with it being built from the ground up with ethics and privacy in mind, and our strategic partnership with Flock Safety for a similar approach for fixed ALPR cameras.\n We really think it's a watershed change in the way ALPR as a category will work.\n Great. Thank you so much.\n Thank you, Charlie. OK. We'll move to Mark Strouse from JP Morgan. Go ahead, Mark.\n Hey, thanks, everybody. Thanks for taking our questions. Pretty impressive international growth the last couple of quarters. Just kind of curious, are you -- what trends you're seeing as far as those customers signing up for recurring payment plans? Or are these really just kind of one-off purchases?\n Hey, Mark. Great to see you again and thanks for the question. So ultimately, I think it's a combination of a few things. Certainly, as we open up new international markets, those first-time orders are probably not going to be on recurring payment plans.\n That's due to our -- we want to make sure we have the ability to collect on all these plans. And when we enter markets for the first time, we'd like to see some payment history there first. So that -- those will be kind of one-time contributors to revenue and we expect those to continue from newer markets, as well as, markets making their second and third buys in their TASER programs. The teams have done an awesome job, especially in the U.K.\n and in Canada, driving most of our new deals toward subscriptions. In the U.K., I believe almost every or every department is already on a TASER payment plan as opposed to one-time purchases. I think we'll see more of that in Australia over the next 12 months as T7 starts to get legs there and same in Canada. And so, I think in our more established international markets, we'll definitely see more recurring payments on CWs and video alike.\n And then in our newer kind of first and second time buyer type markets, those will be driven by more one-time revenue transactions there as we shift those new weapons.\n OK. Thanks, Josh. And then Rick, this is the highest cash balance that you've had in a long time, maybe ever. Can you just talk about your plans for that cash? I mean, obviously, there's a lot of organic investments that you've been talking about for the last several quarters, but how should we think about M&A? How important is that going to be going forward now with this cash truer than enough?\n Yeah. Got it. I can't help but smile. I remember the days when we're struggling to pay the light bill and putting stuff on credit cards.\n You know, we've got almost $700 million in cash. I would also say that historically, as you know, I'm a skeptic on M&A that I think I'm a Chicago school guy, markets are pretty efficient. M&A a lot of times it always drives up the price of the acquired, frequently to the detriment of the acquirer. And we still approach M&A from that position that it has to be unquestionably more valuable as a part of our ecosystem than as a stand-alone in order for an acquisition to make sense for all the headaches that come with integrating different companies.\n That being said, I think we are in a unique position where we have built, and we now have this fairly ubiquitous cloud software and connected hardware and ecosystem, then make things like partnerships Flock Safety become pretty -- pretty powerful, as well as, we are really building out our M&A function. It's actually under Andrea James, who's doing a fantastic job. We've been building out a team beneath her. We get a ton of inbound inquiries and the vast majority of the time we say, no, because we are on a mission.\n We've got a lot of focus, but we are starting to see -- there are things that will be interesting partnerships and there are some things that could be interesting acquisitions, and we have plenty of cash to have the flexibility to do it when it makes sense. But I just want to reassure you, we start from the position of no and that we have to overcome some pretty skeptical hurdles before we're going to spend the money, you, our shareholders gave us. We're going to treat it very carefully, as if it's the same money I was using to pay those light bills 25 years ago.\n Good. Thank you.\n Thanks, Mark for the questions. Thanks, Rick. All right. We'll take our next question from Jeremy Hamblin with Craig-Hallum now.\n Thanks, Jeremy. Go ahead.\n Thanks, Andrea. So my question is actually a follow-up really on that that cash balance and what you potentially could do with it. You know, you've built some inventory here. You have some clients that may be strapped a little bit in the near-term on cash flow.\n Do you use some of that cash to potentially do kind of TASER 60-type financing here, where we look to bridge the gap in the near term while there may be some budget crunch? And that's one of the uses of cash.\n Yeah. I'll start with this one. So one of the things I love about our cash balance and our position, our balance sheet is the optionality it provides us. And Jeremy, you've honed in on a couple of things that we've been able to do with that optionality.\n One is of course, the inventory build. It was a material amount of cash in the quarter and we felt like it was the right thing to do. It positions us really well to be able to deliver the much-needed products to our customers in the back half of the year and beyond. And then on the payment plans, which you know, you touched upon, Josh first brought this up when the coronavirus really started becoming problematic for our customers.\n There were concerns about budgets and we talked about, hey, look, we're signing up multi-year contracts with our customers. We have long-standing relationships with them. We're going to have relationships that -- with them that will extend far beyond the coronavirus, and so, we want to make sure that we're doing right by them. And it's easier for us to get flexible on payment terms to help bridge them to a time when they are no longer -- they don't have concerns about budget.\n And so, when you have five, 10-year contracts, you can get creative and that's what we've done. It's been fairly -- on a smaller scale, it's been fairly negligible across the entire portfolio of contracts, but it is something that we've offered in select cases.\n Yeah. I would just nod to that and say, like, ultimately, while there have been some data points to suggest individual customers asking for kind of a rework of their accounts receivable. It hasn't been very widespread. I personally attribute this to the fact that we have customers that are paying for value that we are delivering across our product lines and we haven't seen any of these kind of asks like to push payments out multiple years or to not pay us for the -- anything for the next couple of years.\n I think ultimately, our customers are seeing value in what we're delivering and we're very honored to continue to provide that value to this market, and only in very kind of edge cases have we had to entertain situations like that.\n Great. And then just a follow-up question here on your progress on federal contracts. In terms of thinking about the negotiations in those contracts, the tenure of the contracts, are you seeing them extend longer when you're having discussions? It's still somewhat early in the ramp of that channel of business. Are they looking to start shorter contracts and see how it goes, and then -- and then, get into some longer deals? Just any color you can share on progression there?\n Sure thing. So a gentleman by the name of Richard Coleman has just done a fantastic job over the last couple of years, building up our federal pipeline. And for the first time, we are seeing customers willing to engage in multi-year engagements with us on both body cameras, but also on the TASER side. So we're very excited.\n There are, you know -- it's not always easy to get federal customers to buy hardware in kind of annual phases as opposed to one-time purchases. So we're learning a little there and there is some of that, but other federal agencies are heavily engaged in these five-year plans for both weapons and video. Federal takes time, it's a slog, but for the first time in really 10 years here, I feel like we're starting to break through and crack the code of how to work with federal customers, and that's largely due to Richard's contributions. And hopefully, we start to see a lot of that growth materialize over the next couple of years here.\n Thanks, guys. Good work. Good to be back on this one.\n Thanks, guys.\n Welcome back, Jeremy. Good to see you.\n I think we want to get through to at least, I think, four more analysts. So we'll keep this going here. Jonathan Ho from William Blair. Go ahead, Jonathan.\n Can you hear me, OK? Great. So just relative to, I guess, the current budget environment, are you seeing traditional RFP processes perhaps start to stall? And could that maybe open up some more opportunities for you to disrupt the traditional, I guess, RFP-driven acquisition process for our RMS cat?\n Yeah. Great question, John. And I think ultimately, I haven't seen a huge change in procurement methods. I think some agencies still are issuing RFPs, others are issuing sole sources, and others are issuing more like cooperative procurements or piggy back -- piggy backing off of other contracts that are already in place.\n And so, I'm not sure a ton has changed there. I think the big thing for us is to focus on OSP 7+ adoption because in that event, the customer is already essentially getting the opportunity to deploy our RMS in that bundle. And so, the more we drive up OSP 7+ procurements, the more agencies are exposed to kind of our enterprise software before they make a formal buying decision. And so, that's kind of how we're looking at things in terms of CAD and RMS.\n And I think that strategy is paying off and we're seeing a lot of interest in those products via that purchasing mechanism. And certainly, every day that goes by, we're also getting closer to being ready to compete in RFPs for CAD and RMS to see Baltimore issued an RFI for RMS and we were victorious. So we're -- some competitors that we have a lot of respect for in this market. So we're excited about where this business is going.\n Got it. And then just one for Jawad. In terms of the decision to increase inventory, can you maybe give us a little bit more color in terms of what types of components you had concerns around and maybe what risks you're seeing around the supply chain? Thank you.\n Yeah. Maybe I'd lead off on that and then Jawad could add some additional context. So as we looked at really our kind of next six to 12 months based on our previous experience with really adjusting for tariffs, we wanted to make sure that we were going to be able to supply our customers with key products for two major upgrades, AB3, as well as, TASER 7. And so, we made the decision to add additional inventory to ensure that we would have product on hand for those in addition to making sure that we would have a good buffer for any potential supply chain disruptions due to COVID.\n We also have a couple really, really big orders coming in Q3 that are kind of outside the context of our normal inventory build. I would let you know, the majority of that inventory is going into finished goods, which is something that me and Josh Isner feel really strongly about it. We can build it up into a finished product, we're going to find a home for it.\n Yeah. And the only other thing I'd add from a financial standpoint, this doesn't happen often. But there have been times when we've left revenue on the table at the end of the quarter because we didn't have inventory and that's not a great thing to have happened. And especially when you've got the flexibility with our balance sheet to be able to have a bit of an inventory buffer.\n And so, you know, that's what we've committed to. And in addition to the factors that Luke mentioned, we never want to be in a position where we leave revenue on the table.\n Thanks, guys. We'll take a question now from will Will Power at Baird. Go ahead, Will.\n Hey, great. Thanks. You know, Rick, you suggested that it doesn't sound like you're seeing too much of a negative impact from some of the police defunding initiatives today. But I'm wondering if you could comment now that we're in the back half of the year on some of the early discussions with respect to municipal budgets, agency budgets as in -- for 2021.\n What's your sense for their expectations and how that could potentially flow through [Inaudible]?\n Yeah, I'm actually going to hand back to Josh because I think Josh is a little closer to the budgeting side of things. Josh, can you take that one?\n Yeah, sure. So I appreciate the question. I think there has been some reaction from some customers in this regard, right? Like, if you're a major city that relies heavily on tourism, then certainly, that's going to have an impact on how you think about budgeting for the next year. The good new -- the good news here, though, is that customers are viewing our products as mission-critical products.\n Like the -- customers, there's no willingness to not outfit police with TASERS or body cams. And of course, computer-aided dispatch and RMS are also in that bucket. So I think there is some impact to budgets overall. But when you've kind of look at it in terms of, is there impact to the budgets that then impacts the products that customers buy from us, I'd say that's a lot less than the case.\n Yeah. And I would just add another point there. I think if you look at our business, maybe, you know, 10 years ago or even eight years ago, we were really dependent on one core market, our domestic market with one core product. And today, we've got a lot of diversification, not only in our product lines, but also our geographical and even different market segments.\n And so, as we see some puts and takes in different segments or products, we are seeing the evidence with international and some of these early other segments, we still feel really confident there.\n OK. No, that's good to hear. I guess, just as a quick follow-up question. Maybe circling back to international, given the strength you've had the last couple of quarters, any comments you can make with respect to pipeline from here? I'm guessing a lot of those deals you announced this quarter last when the pipeline prior to COVID, how much is COVID impacting your ability to sell there? And how does that -- what over the next several quarters?\n Yeah. Thanks a lot. So there is going to be some lumpiness in international quarter to quarter. But on a year-by-year basis, we still expect very encouraging double-digit growth out of our international revenue.\n COVID, you know, it's impacted our ability to travel. But in most of our key markets now, we've got teams on the ground so it's not like folks are having to travel on planes region to region. We do have teams built out in a lot of key places and distributors supporting us in a lot of key places. So ultimately, the work that's gone into international started three,four years ago.\n And so, the things that are impacting the quarter-to-quarter results, these are things that teams have been working on for quarters and quarters already. So I would expect there's going to be some lumpiness in revenue quarter to quarter internationally. But I do have a lot of confidence that we're trending in a very, very strong direction, both in terms of bookings and revenue, internationally.\n Great. Thank you.\n Thank you. Will, we were admiring your collection of phones in the background there. We'll take our next question from Brian Gesuale at Raymond James. Go ahead, Brian.\n Thanks, Andrea. Just wanted to ask a question on the net retention rate, which was a really good metric of 119% of net dollars, can you maybe provide a little bit of color on how we might think of that between additional seats versus additional functionality that drives incremental ARPU? And how we might want to think about that mix as we move forward?\n Yeah. I'll -- I'll start with that one. So that's a metric that we wanted to introduce for some time now. It's something we've been tracking for a while and we felt confident that you have enough data and enough sort of a history there to be able to start to publish it, and we feel very confident that number will hopefully tick up over time.\n It's a dollar retention. It's not a user retention and so as our -- as we sign more OSP 7, 7+ contracts, which are, of course, at a much higher ARPU, that number will start to tick up. We, at this point, don't disclose ARPU because there's a lot of noise in that number, certainly, between domestic and international. But even within domestic, we have different customers at different stages so we're not yet ready to disclose the ARPU number.\n Does that help, Brian? Is that what you're looking for?\n Yeah. That's perfect. Maybe just to follow-up a little bit. I wanted to just kind of revisit the gross margin kind of assumption for the third quarter and I know you're not going beyond that.\n But how might we think about the duration of these headwinds that you mentioned? I'm sure they're not all on a similar rhythm, but how long do you think they lift over time?\n Yeah. Our expectation is that the one that we mentioned specifically for Q3 will be resolved within Q3. There may be a little bit of spillover into Q4, but it will be on the order of magnitude of a couple of weeks. It's not going to materially impact Q4.\n And so at this point, our best sort of -- sort of outlook there is that it's going to be resolved within Q3. And then, there are other -- I wouldn't necessarily call them a headwind, but we're still working very hard to get our gross margins up in the hardware business. That's something that, you know, obviously, the more software we bring online, that business is printing at 80%-plus gross margin. So as more of our business shift to software, our gross margins will lift there naturally.\n Thank you.\n Thanks, Brian. Andrew Uerkwitz with Oppenheimer, we'll take your question next.\n Great. Thank you, guys. I appreciate the time. Could you help me understand that based on our research, many of your RMS wins are more similar to the module, similar to what I think Jeff mentioned with Baltimore with the use-of-force.\n I assume the expectation is this will lead to kind of a rip and replace for the entire system. So one, am I thinking about this correctly? And then two, how does the accounting and pricing work over the life of a contract for a city that goes this route? And then lastly, kind of in that context, you know, Baltimore signed an OSP 7 contract a year ago. And then, they just recently announced that RMS module. Does that contract get reset? Does it get extended when something like that happens? Or does ASP go up at that point? Could you talk a little bit about the accounting and dynamics of when that happens? Thank you.\n Sure. I'll lead up overall and then let the other guys chime in. So first, on the product point, we're -- like we said, we're seeing a great pipeline of both committed existing commitments, as well as, pipeline from here, both for full records deployment, meaning the full replace of their legacy RMS, as well as, Standard, which is that first module. And so for example, just Baltimore, since they've already made it public, that's a commitment to move to records in its entirety and to fully replace their legacy RMS and we're seeing -- we are ahead of our expectations on the pipeline there, as well as, of course, a larger number of the Standards ones.\n So we're seeing success on both. And again, ultimately, our goal, and we're confident of this outcome, is that we are ultimately going to be on track to become the No. 1 in this category for full records and Standards is just a great part of the path to get there because it's such an easy first step for a given agency to take. And then, I'll let Jawad give more color.\n But fundamentally, on the accounting, again, specifically with regard to OSB 7+, it is part of this overall primafit of the way the public safety buys this technology, where just like for a subscription service like that, where you are buying a thing that has many benefits to it. You are buying a thing that has many benefits to it regardless of whether and when you choose to adopt any given benefit.\n Yeah. And then as far as how the accounting works, the revenue recognition. So we allocate a portion of the overall bundle to records. And that portion we start recognizing once the customer has gone live and let me stop there.\n Is that what you're looking for?\n Yeah. I think so. And does the contract reset then? So like Baltimore signed for OSP 7s, were they paying $199 million a year ago? Or were they paying less than that? And then now that they're rolling out RMS, now they're moving up to that full price. And because they kick that in there, does that reset the contract where now it's five years from now as opposed to five years from a year ago?\n So there -- the price they paid last year is the same they paid this year with a couple of notable exceptions. The first of which is the professional services to deploy RMS is a separate contract. So once they're ready to deploy, they would pay us for the professional services. The second one is, they're going to add -- or they have added some more users because the OSP 7+ often covers sworn officers that are carrying body cam and TASERS.\n But ultimately, they're going to need more users to administer a lot of the elements of an RMS system and see that data and work with reports and so forth. So we do expect some user uptick as agencies start to deploy RMS. The third one is, in Baltimore's case, actually did extend their contract as well to co-term with some of their other items they have with us and I think they extended out a couple of years as part of that. So those are all dynamics that we expect to see.\n But I think the most important thing is we're betting on ourselves to be able to upsell additional new features outside of OSP 7+, two agencies that are deploying our RMS. So transcription is a great example of this and Baltimore paid us additional monies per user to deploy transcription as part of their RMS service. And so for us, I think we do envision some of these kind of value-added features on top of the OSP 7 deliverables as upsell opportunities as agencies deploy RMS.\n Got it. Thank you guys so much. I appreciate that color.\n Love the foosball table as well.\n All right. And we're going to go a little over. Thanks, guys for your patience. We'll take our next question.\n It might be our final question from Pavan Kumar from Northland.\n Hi, guys. Can you hear me?\n Yes.\n We can hear you. Can't see you, but we can hear you.\n Yeah. I disabled my video because I was having some Internet connectivity issue. Thanks for taking my questions. Regarding R&D and SG&A spending as a percentage of revenue in second half in '21, which areas of products would get most focus?\n Yeah, I'll start with that. And Jeff, if you'd like to weigh in. So right now, the majority of our R&D is on -- is being spent on software. We're very excited about what we've got in the pipeline from a software standpoint.\n As you saw quarter over quarter, our SG&A was actually flat and our R&D grew, and that was very much by design. Our R&D growth -- well based revenue growth this year. But you know, at some point, we have long-term targets that we've set of 30% on EBITDA and the way that we're going to get there is by allowing more of the revenue growth to fall to the bottom line. But overall, the investments we're making in R&D, we think, are going to help pay off over a long horizon and get our -- keep our revenue growth rate above 20%.\n Great. Regarding competition, like who are the competitors we are seeing most on the Records deal?\n Sorry, the question was Records competition if heard you?\n Yes, yes.\n OK. Yeah. I think there are some competitors that I was -- I would characterize as companies that have been in the records business for a long time. And a lot of them are incumbents and we have a lot of respect for those companies.\n We certainly believe kind of our new innovative approach to records will lead to customer adoption in times away from some of those products just like we saw in Baltimore, and there are new entrants to the space as well. And ultimately, like the combination of our channel coupled with the amount of investment and talent we're bringing on on the product side, we think that we're really well-positioned for the long term. I think for the newer competitors, certainly, they have more constraints around channel and spend than we might, and for some of the incumbent competitors, they probably have a little more constraint around servicing existing customers as opposed to really innovating quickly. And so, we view ourselves as a really disruptive entrant into this market and we're very hopeful that we can become the market leader in due time.\n Yeah, that's right. I mean I think, first, we always like to say that we obsess first and foremost, about our customers. We're happy to have our competitors obsessed about us, but we like to focus on the customer. But exactly, as Josh said, you know, overall, both the legacy providers, as well as, some of the new ones, Axon just has a pretty unique combination of assets that makes us different, both in the legacy incumbent and the newer start-ups.\n Because the legacy incumbents are simply not cloud-first and born-cloud and you fundamentally can deliver the kinds of results that the departments of today and tomorrow need without being born in the cloud. And on the other hand, the newer start-ups simply don't have the network of sensors and signals that are connected into services. That can also do the same thing. We're really the only company that has that combination of both, which is why we're so excited about where we're ultimately going to deliver for customers in this category.\n Great. Thank you.\n I think that's all of our questions. I'm just looking at all your screens here. OK, let's have Rick close this out.\n All right. We're a little over. So let's keep it quick. Thank you, everybody, for joining us.\n We're confident. We'll all look back on 2020 is the time that set in motion the next wave of policing reform and the next leg of growth for Axon. We hope you stay safe, healthy, sane during this period of continued disruption, and we look forward to updating you on our progress against our mission in November. And don't forget to come to Axon Accelerate in a couple of weeks, and you'll see a lot more detail on our product road map.\n Thanks, and buh-bye.\n | Axon Enterprise | (NASDAQ:AAXN) | Aug 06, 2020 | 5:00 p.m. ET | 5 | pm | 2020-08-06 | 2020-08-07 | 2020-08-06 | 2020-08-10 | NASDAQ | Good. | Good. | [0.6504716 0.05828208 0.29124624] | positive | 0.592190 | 2020-08-10 | 85.500000 | 88.000000 | 82.500000 | 83.879997 | 2278757.0 | 84.169998 | 85.150002 | 82.959999 | 83.139999 | 674298.0 | Aerospace & Defense | 2020-06-30 | 2020-06-30 | -0.01 | 0.166913 | 2020-06-30 | AAXN | -0.176913 | miss | -2.360001 | decrease | 0 | positive |
| 4 | ABMD | /earnings/call-transcripts/2020/08/06/abiomed-inc-abmd-q1-2021-earnings-call-transcript.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Abiomed Inc</strong> <span class="ticker" data-id="202700">(<a href="https://www.fool.com/quote/nasdaq/abiomed-inc/abmd/">NASDAQ:ABMD</a>)</span><br/>Q1 2021 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:00 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the Abiomed First Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Todd Trapp. Sir, you may begin.</p><p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p><p>Thanks, Crystal, and good morning, and welcome to Abiomed's first quarter fiscal year 2021 earnings conference call. This is Todd Trapp, Vice President and Chief Financial Officer. And we're here with Mike Minogue, Abiomed's Chairman, President and Chief Executive Officer. The format for today's call will be as follows. First, Mike will discuss the first quarter business and operational highlights, and then I'll review our financial results, which are outlined in today's press release. After that, we will open the call to your questions. Before we begin, I would like to remind everyone that today's call includes forward-looking statements. The company cautions investors that any forward-looking statements involves risks and uncertainties and are not a guaranteed in the future. Actual results may differ materially due to a variety of factors identified in our earnings press release, and our most recent 10-K and 10-Q filed with the SEC. We do not undertake any obligation to update forward-looking statements. With that, let me turn the call over to Abiomed's Chairman, President and Chief Executive Officer, Mike Minogue.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Thank you, Todd and good morning, everyone. The COVID-19 pandemic has sharpened our sense of responsibility and commitment to patients and our communities. We've had to work harder and smarter during this health crisis, and I am grateful and impressed by the way in which our employees and customers have risen and given their best to meet these unprecedented challenges. During Q1, we prioritized keeping our employees safe, supporting our patients and manufacturing our life-saving heart pumps, while investing in innovation. Coronavirus has brought changes to our operations, but our focus and the core of what we do remains the same: improving outcomes for our patients with innovation and strong execution. At Abiomed, our four principles, operating procedures and patients-first culture, enable us to lead, manage, adapt and execute, especially in challenging times. We achieved our Q1 goals, including monthly sequential growth, regulatory milestones and advanced our innovation and education. Our disciplined execution in Q1 delivered one of our most productive quarters in my 16-year tenure with the company. Despite the impact of the pandemic on our commercial organization in Q1, Abiomed delivered $165 million in revenue, down 21% year-over-year. Within the quarter, we achieved monthly sequential growth in April, May and June and 4% year-over-year growth in revenue in June overall.</p><p>In June, patients and revenue increased year-over-year in the U.S., Europe and Japan, as countries began to reopen and hospital restrictions were eased on high-risk, urgent and emergent patients. Abiomed remained productive and relevant in the field by supporting cases and actively educating physicians through videoconferences and broadcasting live cases with expert panels. We successfully controlled costs and expenses driving a solid 21% operating margin, while continuing to invest $26 million in research and innovation. Our balance sheet remains robust with nearly $600 million in cash and zero debt, and our patent portfolio now contains 884 patents and 759 patent spending. For today's call, I will cover the transition from our Q1 red phase to our Q2 yellow phase and our transformation into Abiomed 2.0 in fiscal 2021. We are investing in and executing on our plan for innovation, driving smaller, smarter, more connected products along with strengthening our training, education, and clinical evidence. As we discussed on our last earnings call, for the fiscal year, we designated a three-phase red, yellow, green plan, challenging realities of the COVID-19 environment. We called Q1 red because the broad state of restrictions on elective cases and limited access to most hospitals along with limitations on travel, in-person meetings, and normal headquarters operations.</p><p>In Q1, we focused on completing the SmartAssist console upgrades and accelerating the rollout of Impella Connect. Both technologies help treatment ease of use and potentially improve outcomes. We now have 1,025 sites with SmartAssist and 257 U.S. sites online with Impella Connect, more than doubling the number of connected accounts since March. Additionally, 402 sites already have the hardware on the console, and we only need hospital Wi-Fi permission to activate the Impella Connect account. Impella Connect allows Abiomed personnel to monitor the Impella console in the cloud and interact with the medical providers remotely on topics, such as hemodynamics, alarm management and winning capabilities. Our transition to Abiomed 2.0 encompasses online everything or moving a large portion of business activities to an online connected format that includes management reviews, customer service, and virtual training and education for customers and employees. An example of Abiomed 2.0 execution in Q1 was our team's ability to stay connected with doctors and customers throughout the pandemic, providing education and training virtually.</p><p>Within the quarter, we reached roughly 950 doctors through online professional education and training. Additionally, on a weekly basis, we connected with anywhere from 60 to 150-plus cardiologists and cardiac surgeons to identify lessons learned in treating patients with cardiogenic shock, myocarditis, COVID-19, and organ failure. We have been reviewing and collecting specific case studies on Impella and ECMO support for patients with and without COVID-19. As a result of our ability to adapt and track data in our clinical databases, we were able to receive FDA emergency youth authorization for ECPella this week, which further validates the unloading benefit of Impella with ECMO support for patients in shock requiring oxygenation. Another important 2.0 milestone was the launch of CAMP PCI, our largest training and education initiative in company history. We recruited an esteemed faculty of physicians, launched a cutting-edge platform and held a successful virtual users meeting on June 5th, attended by physicians from the United States and Europe. CAMP PCI leverages advanced digital content, such as live virtual weekly cases and proctorships from world-renowned interventional cardiologists. We remain focused on establishing CAMP PCI and the user group as the best online in interactive education and training resource in cardiology.</p><p>Moving on to product pipeline. In May, we shifted to the full market release of Impella 5.5 with SmartAssist and our expanded surgical organization. At the end of the quarter, the Impella 5.5 was in 86 U.S. sites and more than half are online with Impella Connect. We will continue to launch this 5.5 product with a goal of nearly 100% of the consoles on Impella by the year-end. Clinical data on the first 55 patients treated with the Impella 5.5 with SmartAssist published in the July edition of the American Society of Artificial Internal Organs or SIO, found 84% of patients survived to explant with 76% of survivors having native heart recovery, which is impressive for chronic heart failure patients. It is exciting to see real-world data demonstrating improved survival rates and the benefit of 5.5 unloading for acutely decompensating heart failure patients in cardiogenic shock. Now turning to the regulatory progress. On May 29, we received FDA Emergency Use Authorization for Impella RP to treat COVID-19 patients with right heart failure from pulmonary embolism. Since the onset of the pandemic, the Impella RP has become a therapeutic choice for clinicians treating certain COVID-19 patients suffering right heart failure. This EUA further validates the value of this life-saving product for those patients.</p><p>On May 30th, we received FDA approval for the Impella ECP early feasibility study in the U.S. The prospective multicenter, nonrandomized early feasibility study will allow Abiomed, the study investigators and the FDA to test the device in the U.S. and assess safety and feasibility in high-risk PCI patients. We look forward to beginning enrollment later this calendar year. Moving on to Q2. We have transitioned to our yellow phase, and our manufacturing facilities in Aachen, Germany and Denver, Massachusetts are moving back to full production. During this phase, we've began to see the return of cardiogenic shock protocols and protected PCI procedures in most hospitals and geographies. With that said, we have seen resurgence in COVID cases in certain areas across the globe and in the U.S., which may impact patient access and treatment. Overall, we believe hospitals are better prepared to handle the resurgence of COVID-19 patients, currently due to the availability of testing and more preventative and safety measures in place versus the peak in April.</p><p>In addition, physician societies, hospitals and government agencies are communicating and publishing guidelines on the management of patients with cardiovascular risk factors. These heart failure patients with or without COVID-19 are essential, high risk, emergent and at risk of death, if not treated in a timely manner. Extensive guidelines and physician statements have been published by U.S. and European societies, as well as CMS and other government agencies around the globe. For example, a paper recently published in JACC summarizes guidance from 15 North American cardiovascular societies on the safe reintroduction of cardiovascular services during the COVID-19 pandemic. As a result, hospital systems are providing more timely and improved care for high-risk emergency cardiovascular heart failure patients. Abiomed will continue to provide 24/7 support on-site, on-call and online, while working to improve outcomes for the growing epidemic and increasing mortality of heart failure from coronary artery disease, obesity, Type two diabetes, myocarditis and now COVID-19.</p><p>The U.S. population 65-plus years of age is increasing 44% by 2030 and per a JAMA study, mortality is also increasing for both the 65-plus and the 45 to 65-year-old populations. No other company in med-tech is focused on the science and therapy of unloading the heart and recovering the myocardium. With our Breethe acquisition, we are now uniquely positioned to address, in the future, respiratory failure and combination heart and lung therapy with ECPella as well. I would like to share a story about one of our recent patients. Devon Smith [Phonetic], a 42-year-old warehouse worker from Pennsylvania. He began experiencing flu-like symptoms, muscle aches and difficulty breathing. Devon was transported by ambulance to Mercy Fitzgerald Hospital in Darby, PA, where he was diagnosed with COVID-19, multi-organ failure, severe myocarditis and respiratory failure. With his ejection fraction dangerously ejection fraction dangerously low at 5%, interventional cardiologist, Dr. John Finley inserted the Impella CP to allow Devon's heart to rest and recover. Physicians also placed venous arterial, or VA ECMO, to combat the respiratory effects of COVID-19. Shortly after Devon was transferred to the hospital of the University of Pennsylvania, in Philadelphia. After four days on Impella CP and ECMO support called ECPella, Devon's heart showed dramatic improvement and the Impella and ECMO devices were weaned and explanted. Devon returned home after three weeks in the hospital with his native heart functioning normally at 60% to 65% EF. He is now back at work and looks forward to spending more time with family and working on his car.</p><p>This remarkable story represents great care, a life saved and one of the most cost-effective treatments in healthcare, because it eliminates some of the most expensive and invasive surgeries costing over $0.5 million in hospital charges within six months. These lower costs with quality of life helped both the patient and the insurance provider, which was Blue Cross Blue Shield. Now looking toward the remainder of fiscal 2021. We are focused on our goals as we rebuild Abiomed 2.0. We continue to invest in advanced pipeline technologies including the XR Sheath, Impella ECP, Impella Connect, Impella BTR and new AI algorithms. We remain on track to bring the XR Sheath, an expandable and recordable sheath, that allows for a nine French closure device to the market with Impella 2.5 through a limited market release in our fiscal Q3. Our Breethe ECMO technology remains on track for a 510(k) clearance by the end of the fiscal year. We continue to drive an accelerated rollout of Impella Connect and recently received FDA approval for data streaming from the Impella Connect console, which means console data can be streamed live via Impella Connect to a HIPAA-compliant secure server, where AI will provide predictive clinical information to physicians in the future.</p><p>Turning to clinical data. We began reenrolling patients in our STEMI DTU randomized controlled trial in July. We have recently enrolled five patients and reactivated five sites, totaling 21 patients at 13 hospitals to date. We continue to advance the PROTECT IV RCT study and physician recruitment for the Steering committee has been completed. In the fall, we are planning to release and publish the final data from PROTECT III, which will total over 1,000 patients. The favorable interim report on 898 patients was presented at late-breaking science at TCT in September 2019 last year. PROTECT III is the ongoing prospective single-arm FDA post-approval study for the PMA approval of Impella 2.5 and Impella CP in high-risk PCI. The PROTECT series of studies now represents the largest and most comprehensive study of approximately 1,500 patients treated for high-risk PCI with clinical data reviewed by the FDA from years 2006 to present. Overall, we expect to have multiple meaningful publications this fiscal year. Before I conclude, I want to highlight and recognize the positive real-world interim data on 819 Japanese patients from a multicenter prospective study conducted by The Council for Clinical Use of Ventricular Assist Device Related Academic Societies and the PMDA in Japan. The study conducted at 109 hospitals with oversight by 10 Japanese professional societies found that the use of Impella was associated with a 77% survival rate at 30 days in AMI, cardiogenic shock patients.</p><p>Other findings from the study included that the Impella therapy is highly effective treatment for myocarditis with an 88% survival rate at 30 days. The study's findings about the use of best practices are consistent with other published investigator-led studies, such as national cardiogenic shock initiative study and the Inova shock study that have demonstrated significant increases in survival with the use of Impella best practice protocols compared to the historical survival rate for cardiogenic shock at 50%. In conclusion, I'm proud of Abiomed's execution, delivering on our Q1 red phase commitments and maintaining our focus to recover hearts and save lives. We supported each other, our customers and our patients. We achieved sequential improvements in revenue and patients, strengthened our clinical data, and advanced our pipeline technology.</p><p>Our operational accomplishments in Q1 span the global organization and position our company for success for many years to come. As we progress through the Q2 yellow phase, we know that we must remain focused and adapt to the ever-changing environment with speed in execution. Again, I would like to express my deepest appreciation for our appreciation for our teams across the company and for our customers. I would also like to thank our shareholders for their continued support. We will make fiscal 2021 one of the most productive and transformative years for the company, as we build Abiomed 2.0 and continue to innovate products that are smaller, smarter, and more connected, while we pursue studies for Class I guidelines.</p><p>I will now turn the call over to Todd.</p><p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p><p>Thank you, Mike and thanks, everyone, for joining the call for joining the call today. I hope you and your families are staying safe. During our last quarter call, we talked about the actions we were taking to be prepared for the dynamics of the COVID-19 environment. Those preparations served us well, and as Mike described, we're navigating the near-term challenges, while keeping a focus on the long-term. The negative effects of the pandemic resulted in Q1 revenue of $165 million, down 21% versus prior year. We felt the impact of the environment most intensely in April in terms of the decline in patients and revenue from the shelter-in-place restrictions and limitations on hospital procedures in most countries.</p><p>As Mike mentioned, we saw sequential improvement globally in May and June as restrictions were lifted and limitations eased. In the month of June specifically, we delivered year-over-year global revenue growth of 4%, driven by growth in both patients and revenue in the U.S., Europe, and Japan. We believe we experienced some positive lift in June, as some patients, who had deferred treatment in April and May, began to come back into the system. For your reference, we have provided a slide in our investor package, slide three, which breaks out reported revenue and patient performance by month and by geography. In the U.S., we delivered revenue of $135 million, down 23% year-over-year, driven by a 22% decline in patient utilization.</p><p>The Northeast and California declined the most from an otherwise broad-based decline in utilization in the quarter. U.S. revenue grew 3% in the month of June. In the U. S., at the end of June, the Impella 2.5 and CP have reached 1,451 sites. The Impella 5.0 has been placed in 653 sites, and the RP is in 538 sites. The Impella 5.5 with SmartAssist is now in 86 sites. We continue to receive very positive feedback from the surgeons on this innovative technology as well innovative technology as well as positive real-world clinical data on outcomes. In the quarter, the reorder rate was just shy of 100%. Average combined inventory at the hospitals for the Impella 2.5 and CP was approximately 4.6 units per site, basically in line with the inventory levels we saw last quarter. Outside the U.S., revenue totaled $30 million, down 6% on constant currency due to the negative impact of COVID-19 across all regions. Our European revenue decreased 10% on constant, driven by weakness in Germany, France and the Benelux region. Specifically, German revenue was down 9% in the quarter, driven by softness in high-risk PCI. For the month of June, revenue in Germany and Europe was flat and up 5%, respectively, on a year-over-year basis.</p><p>In Japan, we delivered $9 million in revenue in Q1, up 3% on constant currency due to the impact of COVID-19 and lower site openings. This quarter, we opened 13 new sites, nine fewer than a year ago. As a reminder to investors, we front-loaded site openings in the first half of last year to allow the local team to focus on the post-approval study in a broader CP launch. Similar to other regions, Japan did see a recovery within the quarter as revenue in the month of June increased 22% year-over-year. Gross margin was 78.2% in the quarter, compared to 82.1% in the prior year. The year-over-year variance was primarily driven by lower production volume and some incremental costs to accelerate the Impella Connect rollout.</p><p>As Mike mentioned, one of the objectives of the Q1 red phase was to continue to invest in innovation, while being fiscally responsible. In the first quarter, R&D expense totaled $26 million, an increase of 11% versus prior year. We invested in small bore devices, specifically the XR sheath and ECP and in clinical studies including STEMI DTU and PROTECT IV to support our long-term sustainable growth. SG&A expenses for the first quarter totaled $68 million, down 21% versus prior year. The variance was driven by our emphasis on lower discretionary expenses, executive and management salary reductions, reduced work schedules and lower stock-based compensation in the quarter. Q1 operating income was $34 million, translating to an operating margin of 20.7% versus 29.2% in the prior year. The year-over-year margin performance was primarily was primarily driven by lower volume in our ongoing growth investments despite the favorable impact of the cost actions we implemented. GAAP net income for Q1 was $45 million or $0.98 per diluted share versus $1.93 in Q1 fiscal year 2020. The year-over-year performance was driven by lower volume, a mark-to-market adjustment on our Shockwave investment and our tax rate. In Q1, our reported tax rate was 27% versus 14% in the prior year, driven by lower excess tax benefits associated with equity compensation.</p><p>Our balance sheet remains very strong. We generated $32 million of operating cash flow in the quarter, and we ended June with a cash balance of nearly $600 million, up 13% over last year with no debt. Our cash balance declined versus fiscal year-end due to the Breethe acquisition. We continue to be disciplined and have the capital necessary to stay focused on innovation in the long term. The COVID pandemic is still very fluid and continues to evolve differently across geographies. We believe we are likely to continue to experience variable impacts on our business based on some of the surgeons that is occurring in cities across the globe. Given the uncertainty in the environment and consistent with our comments last quarter, we're not in position to provide full year guidance at this time.</p><p>However, to provide transparency to our investors during this period of COVID resurgence, we will provide insight into our July preliminary results. For the month of July, we reported approximately 8% global revenue growth year-over-year, potentially augmented by timing of reorders, favorable sales mix and foreign exchange. However, U.S. patient utilization for the month of July was down approximately 4% year-over-year, driven by a resurgent in COVID cases across select areas, such as Florida, Texas and California. Japan has also seen a resurgence in COVID cases, which has impact on utilization, resulting in single-digit patient growth for the month. Abiomed has a benefit of patient visibility by hospital, by physician and by indication through our on site, on call and online tracking included in our IQ database and Impella Connect platform. We will continue to monitor the fluid situation and will provide updates as necessary.</p><p>In conclusion, while Q1 was a challenging quarter, we are very pleased with our operational performance and our sequential improvement in both revenue and patients as we transition to the Q2 yellow phase. We still face short-term uncertainties given the depth and unknown duration of the pandemic, and we are focused on the actions we can take and what we can control. We will continue to be agile, which allows us to adapt and execute quickly and remain focused on our fiscal year 2021 goals. We are confident in our overall strategy in the significant opportunities ahead for Abiomed.</p><p>With that, operator, please now open the line for questions.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-6660">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-6660');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>Thank you. And our first question Raj Denhoy from Jefferies. Your line is open.</p><p><strong>Raj Denhoy</strong> -- <em>Jefferies -- Analyst</em></p><p>Hi, good morning. Wonder if maybe I could start with some additional detail perhaps on June and July. I'm curious if there's anything you can provide in terms of whether there was some deferral catch-up that maybe drove the better performance in June. And then maybe as you're getting into July, that's more of a normalized demand. Is there anything you can offer just in terms of the complexion of maybe patients coming back that were previously not done? And how that maybe impacts the growth going forward?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Yes, Raj, it's a good question. So in terms of June, obviously, part of it was driven from some of the, what I'd say, reorder rates that were a little bit lower in April and May as hospitals kind of managed inventory. So we saw reorder rates fairly low in those months, and there was a little bit of a catch-up, I would say, in the month of June. With that said, I mean, our patient growth in June was up 7% in the United States versus 3% from a revenue standpoint. As I think about July, a couple of things I'd point out. First, it's one month, right? And I don't think you can translate to performance to the entire quarter. As I mentioned, we had a really strong finish to June, and some of those reorders did push into July.</p><p>One thing we are seeing is we are seeing a favorable sales mix as the 2.5 is really being replaced by the CP and the 5.0 is being replaced by the 5.5. So we've seen some benefits of higher average selling prices there. We saw a little bit more 5.5 deals as well in the month of July. And the FX rate, too, is a little bit of a -- I would say, a little bit of a tailwind. The euro rate was $1.18 in July this year versus $1.12 last year. So there's a little bit of noise, I would say, in the month of July. But overall, it's one month. We still have a long way to go. And the only other thing I'd point out about July and Q2 is, we did have a really strong September, and I just want to make sure people understand that we have some tough comps in the latter half of the year. September's growth rate was about 25%. So just, I would say, don't get ahead of us a little bit in the month of July.</p><p><strong>Raj Denhoy</strong> -- <em>Jefferies -- Analyst</em></p><p>Understood. And maybe just one last one in terms of the complexion of revenues. It looked like Shock was still down maybe high-teens. PCI was down maybe twice that rate. The question has risen about why Shock is not coming back? Why there's still such a falloff in that kind of very emergent need to treat indication? And so anything you can offer in terms of whether you're seeing any desperate rebound in that versus PCI as we're going forward?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Yes, Raj. I can tell you, for the quarter, high-risk PCI was down 35% and shock was down 12%. But as you look at how it progressed through the quarter, for the month of June, actually, Shock was up almost double digits and high-risk PCI was basically flattish. So we definitely saw a stronger recovery in both indications, but a little bit stronger on the Shock side and an increase in RP.</p><p><strong>Raj Denhoy</strong> -- <em>Jefferies -- Analyst</em></p><p>Great. I'll leave it there. Thank you.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Thanks, Raj.</p><p><strong>Operator</strong></p><p>Thank You. Our next question comes from Margaret Kaczor from William Blair. Your line is open.</p><p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p><p>Good morning and thanks for taking the questions. I just wanted to follow-up again on the July commentary. We were -- recently who also saw some maybe delays in July, but they suggested that maybe some of those were just truly delays and already getting rescheduled for the next couple of weeks. So I was curious if you guys are seeing that as well? Or is it too early to tell?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Margaret, I want to make sure I clarify the question. The is it about a rebound in July from some of the delays?</p><p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p><p>Yeah, correct. And the timing of rescheduling some of those cases.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Sure. So obviously, a few of our patients are getting CPR. And in April, when systems were really overwhelmed, for example, in New York City and in Italy, basic treatment for cardiovascular diseases was pretty much on hold, unfortunately. However, what we did see is, as things progressed, we saw a strong rebound in Italy and New York City and had positive months in patients in both May and June in those areas. As I mentioned in my prepared remarks, the societies in Europe, in the U.S. and even the government agencies like CMS are now putting out guidance documents because cardiovascular patients that are high risk or urgent or emergent have high risk of death if they're not treated in a timely manner.</p><p>So they're doing a much better job. And so we feel confident that the system will get broken again or overwhelmed and what is that as things progress, they're able to rebound, they're able to still treat those emergency patients because, again, they have an imminent risk. And in some cases, they have a higher risk of death than some COVID patients when they're in profound organ failure. So that's the trend we've been seeing. We're optimistic about it. However, there are some places that have been a little overwhelmed in the ICU. We're able to track that in those areas where we don't get as much interaction into the hospital, having the Impella Connect and having the telesales or the clinical team there calling in, helping on cases is very productive as well.</p><p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p><p>Okay. Yes. That's helpful. And then I wanted to clarify, I think you had referenced your in the yellow phase. What are the changes that you're making commercially as you're in this phase? And should we assume that there is a potential for growth? Or is comps going to impact that a bit?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>It's a great question. And so as we look at the year, we're providing total transparency to our investors, you can see how we're managing and what we're seeing relative to both revenue and patients. The red phase was really driven by a bit of the unknown, and there was less preventative care. There was less documented guidelines, and we think we've managed through that pretty well. And we really truly invested in the innovation, things that we can control. As we move to the yellow phase, it has to do now with continuing to advance the product innovation, the regulatory approvals, ramping up again our clinical studies, moving forward on lots of publications and managing not just COVID logistics but the anxieties.</p><p>And so the way we're doing that is, we want to become experts at testing, whether for the antibodies or the active case. And so we're buying tests. We're performing tests. We have local accounts that we can send our people to. We run drills once a week, where we do a COVID mock drill where a person is identified to potentially have it. They run through the process. We clean out their cubical, their office, we sterilize it. And we ask them now to go and get tested, not that upper nasal test but some of these less invasive procedures that are lower nasal or saliva. We just want people to get used to that process because I think the anxiety is tougher than logistics. We've only had 15 cases globally. We haven't had any patients that have had death, and we only had one hospitalized briefly, but the person is doing fine now. So we've again, we want to make sure that we manage everything here in the office.</p><p>We've never shut down in the office, but we had a skeleton crew for manufacturing and logistics. Now we're moving back to full production. And it's a bit business as usual. From a customer education and training perspective, they are used to now being on virtual calls. We do weekly live cases now. So every Wednesday, we have a live case with from a hospital, where physician panel experts and people call in. We record it for people to watch it later on CAMP PCI, but we've pretty much moved everything now into supporting virtual training, virtual education for both our customers and our employees.</p><p>And we are confident that we have the right blend of what we can control, what we can influence around outcomes and what we can endure. And so we'll continue to endure the COVID-19, but again, our main focus is improving outcomes and growing patients and revenue year-over-year in Q2.</p><p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p><p>Great. And if I can, one last one. Just the new data in Japan, obviously, spectacular -- the growth that you guys saw in June with spectacular. Notwithstanding, any COVID spikes, how should we think about progression there? Whether it's commercially or revenue oriented or maybe some societal responses? Thanks much.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>The Japan interim data is very positive. We're going to finish out the final study, but that was presented by the Chairman of the Japanese Committee on Ventricle Assist Device Usage. We feel good that the Japanese physicians are implementing best practices. They tend to show a lot of rigor and discipline in their protocols. And we -- with the exception of some of the flare-ups in Japan, we again love the fact that the primary focus with the Japanese physicians is native heart recovery. And we're moving forward to get the Impella 5.5 in Japan as soon as we can.</p><p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p><p>Thanks guys.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Chris Pasquale from Guggenheim. Your line is open.</p><p><strong>Chris Pasquale</strong> -- <em>Guggenheim -- Analyst</em></p><p>Thanks. A couple of questions. First, Todd, I wanted to circle back on the June-July commentary in July, specifically the delta between revenue and patients treated is wider than we tend to see from you guys. Can you give us a bit better sense for the impact you're seeing from mix? And then the catch-up in reorders make sense, but you really didn't report a decrease in inventory levels or reorder rates in 1Q. So how big of a catch-up do you really need to see there? Why didn't we see more of a dip in the quarter?</p><p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p><p>Yeah. So Chris, it's a good question. The reorder rate actually for the month of for the quarter was about 0.98. And so we've been typically a little over 1.01, 1.02 in the past several in the past several quarters. So the reorder rate was a little bit slow. And again, as you look at how it progressed through the quarter, I mean, April and May, the reorder rates were down in the low 90s. And then there was a little bit of a catch-up in June. But from an overall quarter perspective, it was still below 100%.</p><p>So when I look at July's performance, and let's just take the U.S., for example, we are seeing about, I would say, two to three -- probably three plus points just from a stronger reorder point. Again, a lot of the June was really strong. And so at the end of June, some of those reorders did push into July, and I would say that's probably driving three points of growth in the month of July.</p><p>The other big point, as I mentioned, is the mix on our business. And so if you think about CP, CP was down 18% in the first quarter, 2.5 was down over 60%. And so we see a higher average selling price on the CP versus 2.5, so we're seeing some mix there, as well as the acceleration of our 5.5 versus our 5.0 and that's driving obviously some mix, too. So I would say from a sales mix perspective, it's probably two.five, three points as well in the month of July.</p><p>And the other thing, too, which we're seeing is because of the Emergency Use Authorization that came out in early June, we are seeing some nice pickup in RP. And our RP actually has a higher average selling price and actually had some nice growth in the month of June and as we head into July.</p><p><strong>Chris Pasquale</strong> -- <em>Guggenheim -- Analyst</em></p><p>That's helpful. I appreciate all the detail there. And then, Mike, it basically sounds like we've transitioned directly to the green phase that you laid out in May, just based on where the business set at the end of the quarter. You're still talking about yellow in 2Q. So what elements of that green phase are you still not seeing?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Chris, the perspective we have on yellow is that we're not yet green. But we're not in the red phase. And for example, we do have territories and regions that are up and positive. We are launching the new products. And we are back in the office, but we're not at 100% in both facilities while we ramp up, again, manufacturing to full production.</p><p>That being said, you will have and we do have territories that are moving a bit back into the red relative to some of the access into the hospitals. And you have some areas that are moving forward into green. We're very pleased, as I announced. We're back in July reenrolling again and reactivated sites for the STEMI DTU study. So that's a positive, but we're not at every center yet. So until we get to every center, until we get to the we're no longer seeing some of the flare-ups or the ICU constraints, we're not in the green phase.</p><p>But we're able to look at territories and say, by the end of this quarter, we will have territories that are green, and we will have certain territories that maybe flip back to red and hopefully get out of it as fast as we can. We're also pleased that the societies and the government agencies have really stressed the importance to treat high-risk essential emergency patients. Most of our patients have an imminent risk of death if they're not treated, and therefore, they're putting in the processes and the protocols into the hospitals. And many of the hospitals give us access, but even if we don't have direct access into the room, we do with our call center. And again, with Impella Connect, we're managing and monitoring these patients real-time in the cloud.</p><p><strong>Chris Pasquale</strong> -- <em>Guggenheim -- Analyst</em></p><p>Thanks.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Danielle Antalffy from SVB Leerink. Your line is open.</p><p><strong>Danielle Antalffy</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Hi. Good morning, everyone. Thank you so much for taking the question. Just a question on the COVID impact in the quarter. More specifically, the potential positive sales impact with the EUA for RP. I appreciate the left heart did not come until this month or very recently, so no impact there. Any way to quantify sort of how much of sales was tied to COVID patients?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>That's a good question. From what we track, we have over 400 COVID or suspected COVID patients. But in many ways, you're reading about things around organ failure, or myocarditis, that we've been talking about for 10 years, and those are indications were already approved by the FDA. So I think Danielle, the visibility of what's happening where the lungs progress to the heart and it causes kidney failure, the whole element of Impella plus with ECPELLA gives us the ability to break that chain and still drive not just survival but native heart recovery.</p><p>The story that we highlighted of Devon is truly remarkable. And just to point out, again, to everyone, is his native heart function now is back to normal. And so that's the ultimate goal. The ultimate goal should not be survival and it has to go on to other surgeries or a transplant. And I think that what COVID has done is it has increased organ failure, it has increased the need for respiratory failure, so that should drive an increase in ECPELLA. But it's also a lot for people to understand the protocols and looking for what's the cause of death. And the ultimate cause of death is either respiratory failure or heart pump failure. And so for both of those technologies, that's where we're uniquely positioned now to provide a solution. And again, with the goal of native heart recovery.</p><p><strong>Danielle Antalffy</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Right. So I guess the point is, it doesn't matter what causes those issues, whether it's COVID or not, Impella or ECPELLA helps. Okay. So that makes sense. The other point...</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Yes. And one point on that. If you look at diabetes and obesity, that's growing to the point that that could impact 10% of the population. And obesity and type two diabetes causes, causes heart attacks, coronary disease and all these other challenges that patients have. So unfortunately, heart failure is going to continue to grow at a faster pace now with COVID. And the population of 65 is growing 44%, but also the population between 45 and 65 is also showing an increased mortality rate from heart failure.</p><p><strong>Danielle Antalffy</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Understood. Okay. Thank you for that. And you sort of alluded to this in the prepared remarks. But does the COVID dynamic actually motivate hospitals in a bigger way to establish and enforce protocols for cardiogenic shock and maybe even high-risk PCI? Now in this environment, hospitals are crunched for time and money. So perhaps protocols increase efficiency, while also improving outcomes. Is there any dynamic you're seeing there? Or am I stretching too much to get to that?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>I think so. I think that's the way we look at it. It's also why we're doing these weekly calls to constantly talk about best practices, what are we learning about COVID, what are we learning about the treatment. You have COVID on the left side with the heart and the lungs, but you also have COVID causing inflammation, which increases the clotting risk. And so if a patient gets a clot in their lungs or pulmonary embolism, what happens is the right ventricle gets overwhelmed trying to pump across that extra resistance, and that can cause right heart failure.</p><p>So by putting an Impella RP, the Emergency Use Authorization that came out in early June, we the pump can take over the work of ventricle, it can reduce the oxygen demand for both right and by subsequent left ventricles themselves and it allows the physicians to either do TPA to break up the clot or do an aspiration device to suck it out. So there's just lots of tools we're enabling now, but all education is helpful, and that's why we're trying to do as much as we can through these virtual calls and live cases.</p><p><strong>Danielle Antalffy</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Thanks so much.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Matthew O'Brien from Piper Sandler. Your line is open.</p><p><strong>Matthew O'Brien</strong> -- <em>Piper Sandler -- Analyst</em></p><p>More than thanks for taking the questions. Not to keep beating a dead horse here on July. But Todd, you've got a lot of data on the U.S. specifically in the patient number in the quarter sorry, in the month is likely going to get some attention. So what are you seeing between some of the breakout areas, Texas, Florida, Arizona in terms of contraction in patients versus areas that are less affected? So COVID affected areas, are they down 10%-ish, more than that in July and then and in other areas are up 5%, 6%? How do we think about that?</p><p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p><p>Yeah. No, it's a great question. We do have I mean, obviously, we do track patients every day by hospital, by physician. And if you think about the hotspots in the United States, which were, obviously, Florida, Texas, a little bit of Arizona and California, that represents almost 30% of our volumes. And for the month of July, for example, Texas was down close to 30%. And we're seeing not as bad as declines in Florida and California, but still declines more than the 4%. So we are seeing an impact of COVID resurgence in these areas.</p><p>The one thing I would say, Matt, is that the fact of it's not like we saw in New York, right? New York was overwhelmed, New York was some would call broken, and we saw, for example, in April, in New York, our patients were down 90%. They bounced back in June, they were up patients were up 45%. So we know, at the end of the day, that these patients are sick, they're not elective. And that, obviously, we'll see an impact for a month, but there will be -- there should be a bounce back based on what we saw in Q1.</p><p><strong>Matthew O'Brien</strong> -- <em>Piper Sandler -- Analyst</em></p><p>Okay. And that Texas example you provided, you didn't lose a bunch of customers or anything like that in Texas specifically that you explained it. It's really COVID specific that's impacting the business.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>It's specifically COVID related. And it's not all of it.</p><p><strong>Matthew O'Brien</strong> -- <em>Piper Sandler -- Analyst</em></p><p>Got it. Okay. That's really helpful. And then, Mike, you've been touching on this throughout the call. I know you don't want to capitalize on a pandemic. But the technology has been underutilized in a lot of areas for a long time. What kind of catalyst is this going to provide? Again, you talked about RP a little bit, ECPELLA, cardiomyopathy, etcetera. What areas underlying here is this going to really catalyze going forward that may be difficult for investors to see at the investors to see at the moment?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>I think the first subtle point, Matt is, high-risk PCI provides a minimally invasive procedure for a patient. So as compared to CABG or open heart surgery, it could be a preferred mode now for high-risk patients because it's a shorter hospital stay. The second component is for these patients, you want to get it done right, protect the patient, so they don't have a hospital -- longer hospital stay, and you need to get complete revascularization in a single setting rather than staging patients.</p><p>So I think we do see that in areas, as Todd mentioned in June. AMI shock was around 10% growth and high-risk PCI was flat. So that was the opposite of what happened in April, where everything was down, but high-risk PCI was down more. So there's a certain resiliency in our technology because even our high-risk PCI patients aren't technically elective. It's not an orthopedic procedure. And 40% of our high-risk PCI patients are urgent. So they're being admitted into the hospital with chest pain and need to be treated.</p><p>For the shock side, I just think that more education that's out there on what causes a lack of oxygenation and what happens when the heart goes into cardiogenic shock and what's the impact of the kidneys. And so what we've been talking about for many years is this element that unloading itself creates a positive cascade. It rests the myocardium, it helps it to recover, it's actually in our FDA label that it's a therapy to allow for native heart recovery.</p><p>We've also been publishing papers and talking about the benefits on unloading the heart has a positive impact on the kidneys themselves, allows the kidneys to turn back on, make urine and get the impurities out of the body that's in the blood. So there's just -- the whole component now of evolving that and now adding in the need for oxygenation leads to more ECPELLA discussions because the end goal for all these patients has got to be survival with native heart recovery. And in the news, there's constant new vaccines and other drugs, and there was a lot of press on ventilators being used for the right reasons. But ultimately, what we're trying to do is get patients home with their own heart.</p><p><strong>Matthew O'Brien</strong> -- <em>Piper Sandler -- Analyst</em></p><p>Very helpful. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Jayson Bedford from Raymond James. Your line is open.</p><p><strong>Jayson Bedford</strong> -- <em>Raymond James. -- Analyst</em></p><p>Good morning. Just a few questions here. There's been a lot of discussion a lot of discussion around revenue growth versus patient growth. Excluding the ASP uplift tied to moving from CP -- or 2.5 to CP 5.0 to the 5.5, can we assume that pricing in the quarter was generally stable?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Yes. So we just to clarify, we provided in our third slide on the investor deck. We broke out, you'll see in that bottom, there's two boxes. So you got April, May and June, and April, May and June had sequential lift. And then we also broke out to provide complete transparency for June, let everyone see the patient growth and the revenue growth. So as you can see, the U.S. patient growth was 7%. The mix is changing, but the ASPs for the products are the same. And so that's the gist of your question.</p><p>As we move forward into July, when we see an area down, there's a direct correlation with some of the spike in COVID. So outside of the spike in COVID, which we think we see a rebound now as we've seen in New York and some of these other areas, including in Italy, is we feel confident moving forward that we have a good balance now between patients and revenue growth, and we have a playbook in order to go into these territories that might have a flare-up in COVID to allow for these cardiovascular, these high-risk essential patients to be treated. And so that mix is not necessarily driven by purely price, it's being driven by some of the COVID restrictions.</p><p>And then the last is, we appreciate it's a challenging time to give guidance. So we're going to we're providing all these details, so that you can see how we're managing it. And remember that when we say there's an impact in Texas, it's not all regions in Texas, it's not even every hospital. Because we have the IQ database and the telesales and Impella Connect, we're able to see it as it's happening real-time in specific hospitals with specific physicians.</p><p><strong>Jayson Bedford</strong> -- <em>Raymond James. -- Analyst</em></p><p>Okay. But again, as I look at the slide, patient growth was up 7% in the U.S., revenue growth was up 3%, implying some sort of price degradation. I'm guessing that is not the case.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>That is not the case. Jayson, that's not the case at all. I mean the month of June, it would have been the lower reorder rates and it would have been less deals. That's really I mean, it's a 22% patient utilization and 21% growth. So it's very close. And so there's a little bit of puts and takes, but there's no degradation in price.</p><p><strong>Jayson Bedford</strong> -- <em>Raymond James. -- Analyst</em></p><p>Okay. Okay. That's fair. And that's what I suspected. Wanted to ask about 5.5, and I appreciate this is a difficult environment to gauge this. But is 5.5. growing in the market? Or do you see it as largely cannibalizing 5.5 at this point 5.0 at this point?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Both. The 5.5 is a breakthrough product. If you watched the Investor Day, Dr. Ed Solte from Cleveland Clinic, talked about the ease of putting it in, talked about the blood compatibility based on publications and the FDA testing parameters. We believe it's the most blood compatible heart pump ever made. And it really allows for higher flow for patients that have shock including patients that are acutely decompensating that are more heart failure chronic patients.</p><p><strong>Jayson Bedford</strong> -- <em>Raymond James. -- Analyst</em></p><p>Okay. And Mike, just I think 5.5 has been out in Germany a couple of years. I forget the exact approval couple of years. I forget the exact approval time line. Can you just talk about the use of 5.5 versus 5.0 in Germany today?</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Yes. So the 5.0 is still available. It's a lower price point, and it has it's a little more difficult to place. In Germany, we're working through reimbursement issues to as we go through the cycle. It's a bit of a higher price point, and the same will be true in the U.S., but both products are naturally driving into the 5.5 market. So the 5.0 and the LD, that's the direct, you're able to do both with the 5.5. You can place it direct or you can place it with the chest open or you can place it through the axillary artery. And so, I think, that's where the market is going to go long term.</p><p><strong>Jayson Bedford</strong> -- <em>Raymond James. -- Analyst</em></p><p>Okay. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is open.</p><p><strong>David Lewis</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>Hi. Thank you for taking the question. This is Calvin [Phonetic] on for David. Just one clarification on June and July. So I'm just curious, is the growth rate that you've quoted for June, July, inclusive of contribution or benefit from extra selling days? And if so, how many extra selling days are there relative to last year? And the same question for July. And I just have a quick follow-up.</p><p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p><p>Yes. Calvin, this is Todd. So we have 30-patient days in June this year versus last year, and that's how we look at the business, right? So we treat patients every day of the month. Obviously, we had a few more workdays this June versus last June. And if you look at some of the patient volumes in the weekends versus weekdays, there is a little bit of a difference there. So that might have been maybe one int of growth, but we had the same opposite effect in the month of May. So from a quarter standpoint, it nets out.</p><p><strong>David Lewis</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>Got it. Understood. And just a quick follow-up on clinical trials and timing. Just have you guys said or disclosed on kind of estimated timing for PROTECT IV and RECOVER IV enrollment completion and readout? Thanks so much.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>We haven't given the specifics on completion, especially in the COVID times here. However, we have said that we anticipate doing our first patient at the end of our fiscal year, but we'll be obviously monitoring that with the COVID experience around these research centers. We're very excited that the STEMI DTU study is up and running. And as I said, we've had five patients enrolled in July, and we're going to continue to focus on proper execution of both studies.</p><p><strong>David Lewis</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>Great. Thank you.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Thanks Calvin.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from Chris Cooley from Stephens. Your line is open.</p><p><strong>Chris Cooley</strong> -- <em>Stephens -- Analyst</em></p><p>Good morning. Thanks for taking the questions. Maybe just a quick one as a follow-up to the last kind of lot of questions. Could you maybe talk to us about what you can do to accelerate enrollment when we think about STEMI DTU? I know, on the during the Investor Day, you mentioned some of the challenges associated with that here in the COVID environment. But are there ways in these relative centers that you can further accelerate that enrollment? And I'll just go ahead and ask my follow-up now in secession.</p><p>You guys did a phenomenal amount of heavy lifting, while also changing strategically, I think, pretty significantly during the fiscal 1Q. When we think about Abiomed 2.0 now going forward, are there opportunities to use newer technologies like Connect and others to further accelerate further accelerate, not just Connect, but also just the online education to further accelerate adoption in kind of the community setting, more specifically around Protected PCI? Thanks.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>So, Chris, thanks for the question. I'll answer the second one first. CAMP PCI is 100% focused on creating that network, the user group. Every Wednesday, we have live cases now from around the country, and it's been very helpful. I do think it creates awareness with the physicians that are calling in, talking about how they treat these patients, and we do expect how they treat these patients, and we do expect it will drive -- protected PCI will drive some of the awareness of the treatment protocols.</p><p>And we're very excited because physicians now routinely log in calls; they see this as the future. They enjoy getting access to the world's experts and watching these cases. And we're very pleased and very excited, and I think Abiomed 2.0, part of the big game changer for us, is physicians wanting to use this type of user network like CAMP PCI. For your first question on STEMI DTU, there are things we can do. We're doing it, but a lot has to do with just working with our physicians, identifying the stemi patients.</p><p>With the recent guidance documents that are out there, I think there is a lot more visibility again to try to drive the STEMI DTU patients to the hospitals. And our physicians tend to be the thought the hospitals. And our physicians tend to be the thought leaders and the influential folks around the country.</p><p><strong>Chris Cooley</strong> -- <em>Stephens -- Analyst</em></p><p>Thank you.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Thanks Chris.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Marie Thibault from BTIG. Your line is open.</p><p><strong>Marie Thibault</strong> -- <em>BTIG -- Analyst</em></p><p>Hi thanks for taking the questions. I'll ask just one here. I'm curious what you're hearing from your on patient willingness to come in at this point. And given sort of the urgent and emergent nature of many of your procedures, when do you think you might have worked through sort of the majority of that deferred patient backlog that we had from April? Thank you.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Marie, it's a good question. And the answer is it's the yellow phase. So, in some areas, they are making progress. The hospitals and the societies have been successful at getting people to understand the risk of staying at home with chest pain or having a heart attack. And you have sites in areas that are positive and doing well. And you have other sites where there's more fear.</p><p>Part of it has to do with the regional nature and what's happening with the restrictions by the government. But for the most part, everybody knows now that the risk of staying at home with a heart attack is far greater than the risk of contracting COVID-19. And I think as the logistics is worked through, the next phase of this is people understanding the anxieties.</p><p>We're very confident in our physicians and these hospitals that they are completely dedicated, committed to these patients, and whether the patient has COVID-19 or not, there's lots of guidelines and protocols now of how to treat these patients even with COVID-19 that are having are having emergency cardiovascular issues.</p><p><strong>Marie Thibault</strong> -- <em>BTIG -- Analyst</em></p><p>Thank you.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Thanks for the questions.</p><p><strong>Operator</strong></p><p>Thank you. And that does conclude our question-and-answer session for today's call and I'd now like to turn the conference back over to Mike Minogue for any closing remarks.</p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p>Thank you, everyone, for your time today. If you have any follow-up questions, feel free to reach out, and have a great day.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks].</p><p><strong>Duration: 67 minutes</strong></p><h2>Call participants:</h2><p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p><p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p><p><strong>Raj Denhoy</strong> -- <em>Jefferies -- Analyst</em></p><p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p><p><strong>Chris Pasquale</strong> -- <em>Guggenheim -- Analyst</em></p><p><strong>Danielle Antalffy</strong> -- <em>SVB Leerink -- Analyst</em></p><p><strong>Matthew O'Brien</strong> -- <em>Piper Sandler -- Analyst</em></p><p><strong>Jayson Bedford</strong> -- <em>Raymond James. -- Analyst</em></p><p><strong>David Lewis</strong> -- <em>Morgan Stanley -- Analyst</em></p><p><strong>Chris Cooley</strong> -- <em>Stephens -- Analyst</em></p><p><strong>Marie Thibault</strong> -- <em>BTIG -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/abmd">More ABMD analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than ABIOMED, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DABIOMED%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=0f45a4ad-44fc-4767-9cce-4db0f3d48f0f">ten best stocks</a></strong> for investors to buy right now… and ABIOMED, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DABIOMED%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=0f45a4ad-44fc-4767-9cce-4db0f3d48f0f" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Abiomed. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Abiomed. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-18182", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ABMD"], "primary_tickers_companies": ["ABIOMED, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Abiomed Inc (ABMD) Q1 2021 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 83, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-18182"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-18182", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ABMD"], "primary_tickers_companies": ["ABIOMED, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Abiomed Inc (ABMD) Q1 2021 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 83, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ABMD earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Abiomed Inc</strong> <span class="ticker" data-id="202700">(<a href="https://www.fool.com/quote/nasdaq/abiomed-inc/abmd/">NASDAQ:ABMD</a>)</span><br/>Q1 2021 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:00 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the Abiomed First Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Todd Trapp. Sir, you may begin.</p>, <p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p>, <p>Thanks, Crystal, and good morning, and welcome to Abiomed's first quarter fiscal year 2021 earnings conference call. This is Todd Trapp, Vice President and Chief Financial Officer. And we're here with Mike Minogue, Abiomed's Chairman, President and Chief Executive Officer. The format for today's call will be as follows. First, Mike will discuss the first quarter business and operational highlights, and then I'll review our financial results, which are outlined in today's press release. After that, we will open the call to your questions. Before we begin, I would like to remind everyone that today's call includes forward-looking statements. The company cautions investors that any forward-looking statements involves risks and uncertainties and are not a guaranteed in the future. Actual results may differ materially due to a variety of factors identified in our earnings press release, and our most recent 10-K and 10-Q filed with the SEC. We do not undertake any obligation to update forward-looking statements. With that, let me turn the call over to Abiomed's Chairman, President and Chief Executive Officer, Mike Minogue.</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>Thank you, Todd and good morning, everyone. The COVID-19 pandemic has sharpened our sense of responsibility and commitment to patients and our communities. We've had to work harder and smarter during this health crisis, and I am grateful and impressed by the way in which our employees and customers have risen and given their best to meet these unprecedented challenges. During Q1, we prioritized keeping our employees safe, supporting our patients and manufacturing our life-saving heart pumps, while investing in innovation. Coronavirus has brought changes to our operations, but our focus and the core of what we do remains the same: improving outcomes for our patients with innovation and strong execution. At Abiomed, our four principles, operating procedures and patients-first culture, enable us to lead, manage, adapt and execute, especially in challenging times. We achieved our Q1 goals, including monthly sequential growth, regulatory milestones and advanced our innovation and education. Our disciplined execution in Q1 delivered one of our most productive quarters in my 16-year tenure with the company. Despite the impact of the pandemic on our commercial organization in Q1, Abiomed delivered $165 million in revenue, down 21% year-over-year. Within the quarter, we achieved monthly sequential growth in April, May and June and 4% year-over-year growth in revenue in June overall.</p>, <p>In June, patients and revenue increased year-over-year in the U.S., Europe and Japan, as countries began to reopen and hospital restrictions were eased on high-risk, urgent and emergent patients. Abiomed remained productive and relevant in the field by supporting cases and actively educating physicians through videoconferences and broadcasting live cases with expert panels. We successfully controlled costs and expenses driving a solid 21% operating margin, while continuing to invest $26 million in research and innovation. Our balance sheet remains robust with nearly $600 million in cash and zero debt, and our patent portfolio now contains 884 patents and 759 patent spending. For today's call, I will cover the transition from our Q1 red phase to our Q2 yellow phase and our transformation into Abiomed 2.0 in fiscal 2021. We are investing in and executing on our plan for innovation, driving smaller, smarter, more connected products along with strengthening our training, education, and clinical evidence. As we discussed on our last earnings call, for the fiscal year, we designated a three-phase red, yellow, green plan, challenging realities of the COVID-19 environment. We called Q1 red because the broad state of restrictions on elective cases and limited access to most hospitals along with limitations on travel, in-person meetings, and normal headquarters operations.</p>, <p>In Q1, we focused on completing the SmartAssist console upgrades and accelerating the rollout of Impella Connect. Both technologies help treatment ease of use and potentially improve outcomes. We now have 1,025 sites with SmartAssist and 257 U.S. sites online with Impella Connect, more than doubling the number of connected accounts since March. Additionally, 402 sites already have the hardware on the console, and we only need hospital Wi-Fi permission to activate the Impella Connect account. Impella Connect allows Abiomed personnel to monitor the Impella console in the cloud and interact with the medical providers remotely on topics, such as hemodynamics, alarm management and winning capabilities. Our transition to Abiomed 2.0 encompasses online everything or moving a large portion of business activities to an online connected format that includes management reviews, customer service, and virtual training and education for customers and employees. An example of Abiomed 2.0 execution in Q1 was our team's ability to stay connected with doctors and customers throughout the pandemic, providing education and training virtually.</p>, <p>Within the quarter, we reached roughly 950 doctors through online professional education and training. Additionally, on a weekly basis, we connected with anywhere from 60 to 150-plus cardiologists and cardiac surgeons to identify lessons learned in treating patients with cardiogenic shock, myocarditis, COVID-19, and organ failure. We have been reviewing and collecting specific case studies on Impella and ECMO support for patients with and without COVID-19. As a result of our ability to adapt and track data in our clinical databases, we were able to receive FDA emergency youth authorization for ECPella this week, which further validates the unloading benefit of Impella with ECMO support for patients in shock requiring oxygenation. Another important 2.0 milestone was the launch of CAMP PCI, our largest training and education initiative in company history. We recruited an esteemed faculty of physicians, launched a cutting-edge platform and held a successful virtual users meeting on June 5th, attended by physicians from the United States and Europe. CAMP PCI leverages advanced digital content, such as live virtual weekly cases and proctorships from world-renowned interventional cardiologists. We remain focused on establishing CAMP PCI and the user group as the best online in interactive education and training resource in cardiology.</p>, <p>Moving on to product pipeline. In May, we shifted to the full market release of Impella 5.5 with SmartAssist and our expanded surgical organization. At the end of the quarter, the Impella 5.5 was in 86 U.S. sites and more than half are online with Impella Connect. We will continue to launch this 5.5 product with a goal of nearly 100% of the consoles on Impella by the year-end. Clinical data on the first 55 patients treated with the Impella 5.5 with SmartAssist published in the July edition of the American Society of Artificial Internal Organs or SIO, found 84% of patients survived to explant with 76% of survivors having native heart recovery, which is impressive for chronic heart failure patients. It is exciting to see real-world data demonstrating improved survival rates and the benefit of 5.5 unloading for acutely decompensating heart failure patients in cardiogenic shock. Now turning to the regulatory progress. On May 29, we received FDA Emergency Use Authorization for Impella RP to treat COVID-19 patients with right heart failure from pulmonary embolism. Since the onset of the pandemic, the Impella RP has become a therapeutic choice for clinicians treating certain COVID-19 patients suffering right heart failure. This EUA further validates the value of this life-saving product for those patients.</p>, <p>On May 30th, we received FDA approval for the Impella ECP early feasibility study in the U.S. The prospective multicenter, nonrandomized early feasibility study will allow Abiomed, the study investigators and the FDA to test the device in the U.S. and assess safety and feasibility in high-risk PCI patients. We look forward to beginning enrollment later this calendar year. Moving on to Q2. We have transitioned to our yellow phase, and our manufacturing facilities in Aachen, Germany and Denver, Massachusetts are moving back to full production. During this phase, we've began to see the return of cardiogenic shock protocols and protected PCI procedures in most hospitals and geographies. With that said, we have seen resurgence in COVID cases in certain areas across the globe and in the U.S., which may impact patient access and treatment. Overall, we believe hospitals are better prepared to handle the resurgence of COVID-19 patients, currently due to the availability of testing and more preventative and safety measures in place versus the peak in April.</p>, <p>In addition, physician societies, hospitals and government agencies are communicating and publishing guidelines on the management of patients with cardiovascular risk factors. These heart failure patients with or without COVID-19 are essential, high risk, emergent and at risk of death, if not treated in a timely manner. Extensive guidelines and physician statements have been published by U.S. and European societies, as well as CMS and other government agencies around the globe. For example, a paper recently published in JACC summarizes guidance from 15 North American cardiovascular societies on the safe reintroduction of cardiovascular services during the COVID-19 pandemic. As a result, hospital systems are providing more timely and improved care for high-risk emergency cardiovascular heart failure patients. Abiomed will continue to provide 24/7 support on-site, on-call and online, while working to improve outcomes for the growing epidemic and increasing mortality of heart failure from coronary artery disease, obesity, Type two diabetes, myocarditis and now COVID-19.</p>, <p>The U.S. population 65-plus years of age is increasing 44% by 2030 and per a JAMA study, mortality is also increasing for both the 65-plus and the 45 to 65-year-old populations. No other company in med-tech is focused on the science and therapy of unloading the heart and recovering the myocardium. With our Breethe acquisition, we are now uniquely positioned to address, in the future, respiratory failure and combination heart and lung therapy with ECPella as well. I would like to share a story about one of our recent patients. Devon Smith [Phonetic], a 42-year-old warehouse worker from Pennsylvania. He began experiencing flu-like symptoms, muscle aches and difficulty breathing. Devon was transported by ambulance to Mercy Fitzgerald Hospital in Darby, PA, where he was diagnosed with COVID-19, multi-organ failure, severe myocarditis and respiratory failure. With his ejection fraction dangerously ejection fraction dangerously low at 5%, interventional cardiologist, Dr. John Finley inserted the Impella CP to allow Devon's heart to rest and recover. Physicians also placed venous arterial, or VA ECMO, to combat the respiratory effects of COVID-19. Shortly after Devon was transferred to the hospital of the University of Pennsylvania, in Philadelphia. After four days on Impella CP and ECMO support called ECPella, Devon's heart showed dramatic improvement and the Impella and ECMO devices were weaned and explanted. Devon returned home after three weeks in the hospital with his native heart functioning normally at 60% to 65% EF. He is now back at work and looks forward to spending more time with family and working on his car.</p>, <p>This remarkable story represents great care, a life saved and one of the most cost-effective treatments in healthcare, because it eliminates some of the most expensive and invasive surgeries costing over $0.5 million in hospital charges within six months. These lower costs with quality of life helped both the patient and the insurance provider, which was Blue Cross Blue Shield. Now looking toward the remainder of fiscal 2021. We are focused on our goals as we rebuild Abiomed 2.0. We continue to invest in advanced pipeline technologies including the XR Sheath, Impella ECP, Impella Connect, Impella BTR and new AI algorithms. We remain on track to bring the XR Sheath, an expandable and recordable sheath, that allows for a nine French closure device to the market with Impella 2.5 through a limited market release in our fiscal Q3. Our Breethe ECMO technology remains on track for a 510(k) clearance by the end of the fiscal year. We continue to drive an accelerated rollout of Impella Connect and recently received FDA approval for data streaming from the Impella Connect console, which means console data can be streamed live via Impella Connect to a HIPAA-compliant secure server, where AI will provide predictive clinical information to physicians in the future.</p>, <p>Turning to clinical data. We began reenrolling patients in our STEMI DTU randomized controlled trial in July. We have recently enrolled five patients and reactivated five sites, totaling 21 patients at 13 hospitals to date. We continue to advance the PROTECT IV RCT study and physician recruitment for the Steering committee has been completed. In the fall, we are planning to release and publish the final data from PROTECT III, which will total over 1,000 patients. The favorable interim report on 898 patients was presented at late-breaking science at TCT in September 2019 last year. PROTECT III is the ongoing prospective single-arm FDA post-approval study for the PMA approval of Impella 2.5 and Impella CP in high-risk PCI. The PROTECT series of studies now represents the largest and most comprehensive study of approximately 1,500 patients treated for high-risk PCI with clinical data reviewed by the FDA from years 2006 to present. Overall, we expect to have multiple meaningful publications this fiscal year. Before I conclude, I want to highlight and recognize the positive real-world interim data on 819 Japanese patients from a multicenter prospective study conducted by The Council for Clinical Use of Ventricular Assist Device Related Academic Societies and the PMDA in Japan. The study conducted at 109 hospitals with oversight by 10 Japanese professional societies found that the use of Impella was associated with a 77% survival rate at 30 days in AMI, cardiogenic shock patients.</p>, <p>Other findings from the study included that the Impella therapy is highly effective treatment for myocarditis with an 88% survival rate at 30 days. The study's findings about the use of best practices are consistent with other published investigator-led studies, such as national cardiogenic shock initiative study and the Inova shock study that have demonstrated significant increases in survival with the use of Impella best practice protocols compared to the historical survival rate for cardiogenic shock at 50%. In conclusion, I'm proud of Abiomed's execution, delivering on our Q1 red phase commitments and maintaining our focus to recover hearts and save lives. We supported each other, our customers and our patients. We achieved sequential improvements in revenue and patients, strengthened our clinical data, and advanced our pipeline technology.</p>, <p>Our operational accomplishments in Q1 span the global organization and position our company for success for many years to come. As we progress through the Q2 yellow phase, we know that we must remain focused and adapt to the ever-changing environment with speed in execution. Again, I would like to express my deepest appreciation for our appreciation for our teams across the company and for our customers. I would also like to thank our shareholders for their continued support. We will make fiscal 2021 one of the most productive and transformative years for the company, as we build Abiomed 2.0 and continue to innovate products that are smaller, smarter, and more connected, while we pursue studies for Class I guidelines.</p>, <p>I will now turn the call over to Todd.</p>, <p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p>, <p>Thank you, Mike and thanks, everyone, for joining the call for joining the call today. I hope you and your families are staying safe. During our last quarter call, we talked about the actions we were taking to be prepared for the dynamics of the COVID-19 environment. Those preparations served us well, and as Mike described, we're navigating the near-term challenges, while keeping a focus on the long-term. The negative effects of the pandemic resulted in Q1 revenue of $165 million, down 21% versus prior year. We felt the impact of the environment most intensely in April in terms of the decline in patients and revenue from the shelter-in-place restrictions and limitations on hospital procedures in most countries.</p>, <p>As Mike mentioned, we saw sequential improvement globally in May and June as restrictions were lifted and limitations eased. In the month of June specifically, we delivered year-over-year global revenue growth of 4%, driven by growth in both patients and revenue in the U.S., Europe, and Japan. We believe we experienced some positive lift in June, as some patients, who had deferred treatment in April and May, began to come back into the system. For your reference, we have provided a slide in our investor package, slide three, which breaks out reported revenue and patient performance by month and by geography. In the U.S., we delivered revenue of $135 million, down 23% year-over-year, driven by a 22% decline in patient utilization.</p>, <p>The Northeast and California declined the most from an otherwise broad-based decline in utilization in the quarter. U.S. revenue grew 3% in the month of June. In the U. S., at the end of June, the Impella 2.5 and CP have reached 1,451 sites. The Impella 5.0 has been placed in 653 sites, and the RP is in 538 sites. The Impella 5.5 with SmartAssist is now in 86 sites. We continue to receive very positive feedback from the surgeons on this innovative technology as well innovative technology as well as positive real-world clinical data on outcomes. In the quarter, the reorder rate was just shy of 100%. Average combined inventory at the hospitals for the Impella 2.5 and CP was approximately 4.6 units per site, basically in line with the inventory levels we saw last quarter. Outside the U.S., revenue totaled $30 million, down 6% on constant currency due to the negative impact of COVID-19 across all regions. Our European revenue decreased 10% on constant, driven by weakness in Germany, France and the Benelux region. Specifically, German revenue was down 9% in the quarter, driven by softness in high-risk PCI. For the month of June, revenue in Germany and Europe was flat and up 5%, respectively, on a year-over-year basis.</p>, <p>In Japan, we delivered $9 million in revenue in Q1, up 3% on constant currency due to the impact of COVID-19 and lower site openings. This quarter, we opened 13 new sites, nine fewer than a year ago. As a reminder to investors, we front-loaded site openings in the first half of last year to allow the local team to focus on the post-approval study in a broader CP launch. Similar to other regions, Japan did see a recovery within the quarter as revenue in the month of June increased 22% year-over-year. Gross margin was 78.2% in the quarter, compared to 82.1% in the prior year. The year-over-year variance was primarily driven by lower production volume and some incremental costs to accelerate the Impella Connect rollout.</p>, <p>As Mike mentioned, one of the objectives of the Q1 red phase was to continue to invest in innovation, while being fiscally responsible. In the first quarter, R&D expense totaled $26 million, an increase of 11% versus prior year. We invested in small bore devices, specifically the XR sheath and ECP and in clinical studies including STEMI DTU and PROTECT IV to support our long-term sustainable growth. SG&A expenses for the first quarter totaled $68 million, down 21% versus prior year. The variance was driven by our emphasis on lower discretionary expenses, executive and management salary reductions, reduced work schedules and lower stock-based compensation in the quarter. Q1 operating income was $34 million, translating to an operating margin of 20.7% versus 29.2% in the prior year. The year-over-year margin performance was primarily was primarily driven by lower volume in our ongoing growth investments despite the favorable impact of the cost actions we implemented. GAAP net income for Q1 was $45 million or $0.98 per diluted share versus $1.93 in Q1 fiscal year 2020. The year-over-year performance was driven by lower volume, a mark-to-market adjustment on our Shockwave investment and our tax rate. In Q1, our reported tax rate was 27% versus 14% in the prior year, driven by lower excess tax benefits associated with equity compensation.</p>, <p>Our balance sheet remains very strong. We generated $32 million of operating cash flow in the quarter, and we ended June with a cash balance of nearly $600 million, up 13% over last year with no debt. Our cash balance declined versus fiscal year-end due to the Breethe acquisition. We continue to be disciplined and have the capital necessary to stay focused on innovation in the long term. The COVID pandemic is still very fluid and continues to evolve differently across geographies. We believe we are likely to continue to experience variable impacts on our business based on some of the surgeons that is occurring in cities across the globe. Given the uncertainty in the environment and consistent with our comments last quarter, we're not in position to provide full year guidance at this time.</p>, <p>However, to provide transparency to our investors during this period of COVID resurgence, we will provide insight into our July preliminary results. For the month of July, we reported approximately 8% global revenue growth year-over-year, potentially augmented by timing of reorders, favorable sales mix and foreign exchange. However, U.S. patient utilization for the month of July was down approximately 4% year-over-year, driven by a resurgent in COVID cases across select areas, such as Florida, Texas and California. Japan has also seen a resurgence in COVID cases, which has impact on utilization, resulting in single-digit patient growth for the month. Abiomed has a benefit of patient visibility by hospital, by physician and by indication through our on site, on call and online tracking included in our IQ database and Impella Connect platform. We will continue to monitor the fluid situation and will provide updates as necessary.</p>, <p>In conclusion, while Q1 was a challenging quarter, we are very pleased with our operational performance and our sequential improvement in both revenue and patients as we transition to the Q2 yellow phase. We still face short-term uncertainties given the depth and unknown duration of the pandemic, and we are focused on the actions we can take and what we can control. We will continue to be agile, which allows us to adapt and execute quickly and remain focused on our fiscal year 2021 goals. We are confident in our overall strategy in the significant opportunities ahead for Abiomed.</p>, <p>With that, operator, please now open the line for questions.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-6660">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-6660');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>Thank you. And our first question Raj Denhoy from Jefferies. Your line is open.</p>, <p><strong>Raj Denhoy</strong> -- <em>Jefferies -- Analyst</em></p>, <p>Hi, good morning. Wonder if maybe I could start with some additional detail perhaps on June and July. I'm curious if there's anything you can provide in terms of whether there was some deferral catch-up that maybe drove the better performance in June. And then maybe as you're getting into July, that's more of a normalized demand. Is there anything you can offer just in terms of the complexion of maybe patients coming back that were previously not done? And how that maybe impacts the growth going forward?</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>Yes, Raj, it's a good question. So in terms of June, obviously, part of it was driven from some of the, what I'd say, reorder rates that were a little bit lower in April and May as hospitals kind of managed inventory. So we saw reorder rates fairly low in those months, and there was a little bit of a catch-up, I would say, in the month of June. With that said, I mean, our patient growth in June was up 7% in the United States versus 3% from a revenue standpoint. As I think about July, a couple of things I'd point out. First, it's one month, right? And I don't think you can translate to performance to the entire quarter. As I mentioned, we had a really strong finish to June, and some of those reorders did push into July.</p>, <p>One thing we are seeing is we are seeing a favorable sales mix as the 2.5 is really being replaced by the CP and the 5.0 is being replaced by the 5.5. So we've seen some benefits of higher average selling prices there. We saw a little bit more 5.5 deals as well in the month of July. And the FX rate, too, is a little bit of a -- I would say, a little bit of a tailwind. The euro rate was $1.18 in July this year versus $1.12 last year. So there's a little bit of noise, I would say, in the month of July. But overall, it's one month. We still have a long way to go. And the only other thing I'd point out about July and Q2 is, we did have a really strong September, and I just want to make sure people understand that we have some tough comps in the latter half of the year. September's growth rate was about 25%. So just, I would say, don't get ahead of us a little bit in the month of July.</p>, <p><strong>Raj Denhoy</strong> -- <em>Jefferies -- Analyst</em></p>, <p>Understood. And maybe just one last one in terms of the complexion of revenues. It looked like Shock was still down maybe high-teens. PCI was down maybe twice that rate. The question has risen about why Shock is not coming back? Why there's still such a falloff in that kind of very emergent need to treat indication? And so anything you can offer in terms of whether you're seeing any desperate rebound in that versus PCI as we're going forward?</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>Yes, Raj. I can tell you, for the quarter, high-risk PCI was down 35% and shock was down 12%. But as you look at how it progressed through the quarter, for the month of June, actually, Shock was up almost double digits and high-risk PCI was basically flattish. So we definitely saw a stronger recovery in both indications, but a little bit stronger on the Shock side and an increase in RP.</p>, <p><strong>Raj Denhoy</strong> -- <em>Jefferies -- Analyst</em></p>, <p>Great. I'll leave it there. Thank you.</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>Thanks, Raj.</p>, <p><strong>Operator</strong></p>, <p>Thank You. Our next question comes from Margaret Kaczor from William Blair. Your line is open.</p>, <p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p>, <p>Good morning and thanks for taking the questions. I just wanted to follow-up again on the July commentary. We were -- recently who also saw some maybe delays in July, but they suggested that maybe some of those were just truly delays and already getting rescheduled for the next couple of weeks. So I was curious if you guys are seeing that as well? Or is it too early to tell?</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>Margaret, I want to make sure I clarify the question. The is it about a rebound in July from some of the delays?</p>, <p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p>, <p>Yeah, correct. And the timing of rescheduling some of those cases.</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>Sure. So obviously, a few of our patients are getting CPR. And in April, when systems were really overwhelmed, for example, in New York City and in Italy, basic treatment for cardiovascular diseases was pretty much on hold, unfortunately. However, what we did see is, as things progressed, we saw a strong rebound in Italy and New York City and had positive months in patients in both May and June in those areas. As I mentioned in my prepared remarks, the societies in Europe, in the U.S. and even the government agencies like CMS are now putting out guidance documents because cardiovascular patients that are high risk or urgent or emergent have high risk of death if they're not treated in a timely manner.</p>, <p>So they're doing a much better job. And so we feel confident that the system will get broken again or overwhelmed and what is that as things progress, they're able to rebound, they're able to still treat those emergency patients because, again, they have an imminent risk. And in some cases, they have a higher risk of death than some COVID patients when they're in profound organ failure. So that's the trend we've been seeing. We're optimistic about it. However, there are some places that have been a little overwhelmed in the ICU. We're able to track that in those areas where we don't get as much interaction into the hospital, having the Impella Connect and having the telesales or the clinical team there calling in, helping on cases is very productive as well.</p>, <p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p>, <p>Okay. Yes. That's helpful. And then I wanted to clarify, I think you had referenced your in the yellow phase. What are the changes that you're making commercially as you're in this phase? And should we assume that there is a potential for growth? Or is comps going to impact that a bit?</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>It's a great question. And so as we look at the year, we're providing total transparency to our investors, you can see how we're managing and what we're seeing relative to both revenue and patients. The red phase was really driven by a bit of the unknown, and there was less preventative care. There was less documented guidelines, and we think we've managed through that pretty well. And we really truly invested in the innovation, things that we can control. As we move to the yellow phase, it has to do now with continuing to advance the product innovation, the regulatory approvals, ramping up again our clinical studies, moving forward on lots of publications and managing not just COVID logistics but the anxieties.</p>, <p>And so the way we're doing that is, we want to become experts at testing, whether for the antibodies or the active case. And so we're buying tests. We're performing tests. We have local accounts that we can send our people to. We run drills once a week, where we do a COVID mock drill where a person is identified to potentially have it. They run through the process. We clean out their cubical, their office, we sterilize it. And we ask them now to go and get tested, not that upper nasal test but some of these less invasive procedures that are lower nasal or saliva. We just want people to get used to that process because I think the anxiety is tougher than logistics. We've only had 15 cases globally. We haven't had any patients that have had death, and we only had one hospitalized briefly, but the person is doing fine now. So we've again, we want to make sure that we manage everything here in the office.</p>, <p>We've never shut down in the office, but we had a skeleton crew for manufacturing and logistics. Now we're moving back to full production. And it's a bit business as usual. From a customer education and training perspective, they are used to now being on virtual calls. We do weekly live cases now. So every Wednesday, we have a live case with from a hospital, where physician panel experts and people call in. We record it for people to watch it later on CAMP PCI, but we've pretty much moved everything now into supporting virtual training, virtual education for both our customers and our employees.</p>, <p>And we are confident that we have the right blend of what we can control, what we can influence around outcomes and what we can endure. And so we'll continue to endure the COVID-19, but again, our main focus is improving outcomes and growing patients and revenue year-over-year in Q2.</p>, <p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p>, <p>Great. And if I can, one last one. Just the new data in Japan, obviously, spectacular -- the growth that you guys saw in June with spectacular. Notwithstanding, any COVID spikes, how should we think about progression there? Whether it's commercially or revenue oriented or maybe some societal responses? Thanks much.</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>The Japan interim data is very positive. We're going to finish out the final study, but that was presented by the Chairman of the Japanese Committee on Ventricle Assist Device Usage. We feel good that the Japanese physicians are implementing best practices. They tend to show a lot of rigor and discipline in their protocols. And we -- with the exception of some of the flare-ups in Japan, we again love the fact that the primary focus with the Japanese physicians is native heart recovery. And we're moving forward to get the Impella 5.5 in Japan as soon as we can.</p>, <p><strong>Margaret Kaczor</strong> -- <em>William Blair -- Analyst</em></p>, <p>Thanks guys.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Our next question comes from Chris Pasquale from Guggenheim. Your line is open.</p>, <p><strong>Chris Pasquale</strong> -- <em>Guggenheim -- Analyst</em></p>, <p>Thanks. A couple of questions. First, Todd, I wanted to circle back on the June-July commentary in July, specifically the delta between revenue and patients treated is wider than we tend to see from you guys. Can you give us a bit better sense for the impact you're seeing from mix? And then the catch-up in reorders make sense, but you really didn't report a decrease in inventory levels or reorder rates in 1Q. So how big of a catch-up do you really need to see there? Why didn't we see more of a dip in the quarter?</p>, <p><strong>Todd A. Trapp</strong> -- <em>Chief Financial Officer & Vice President</em></p>, <p>Yeah. So Chris, it's a good question. The reorder rate actually for the month of for the quarter was about 0.98. And so we've been typically a little over 1.01, 1.02 in the past several in the past several quarters. So the reorder rate was a little bit slow. And again, as you look at how it progressed through the quarter, I mean, April and May, the reorder rates were down in the low 90s. And then there was a little bit of a catch-up in June. But from an overall quarter perspective, it was still below 100%.</p>, <p>So when I look at July's performance, and let's just take the U.S., for example, we are seeing about, I would say, two to three -- probably three plus points just from a stronger reorder point. Again, a lot of the June was really strong. And so at the end of June, some of those reorders did push into July, and I would say that's probably driving three points of growth in the month of July.</p>, <p>The other big point, as I mentioned, is the mix on our business. And so if you think about CP, CP was down 18% in the first quarter, 2.5 was down over 60%. And so we see a higher average selling price on the CP versus 2.5, so we're seeing some mix there, as well as the acceleration of our 5.5 versus our 5.0 and that's driving obviously some mix, too. So I would say from a sales mix perspective, it's probably two.five, three points as well in the month of July.</p>, <p>And the other thing, too, which we're seeing is because of the Emergency Use Authorization that came out in early June, we are seeing some nice pickup in RP. And our RP actually has a higher average selling price and actually had some nice growth in the month of June and as we head into July.</p>, <p><strong>Chris Pasquale</strong> -- <em>Guggenheim -- Analyst</em></p>, <p>That's helpful. I appreciate all the detail there. And then, Mike, it basically sounds like we've transitioned directly to the green phase that you laid out in May, just based on where the business set at the end of the quarter. You're still talking about yellow in 2Q. So what elements of that green phase are you still not seeing?</p>, <p><strong>Michael R. Minogue</strong> -- <em>Chief Executive Officer, President & Chairman</em></p>, <p>Chris, the perspective we have on yellow is that we're not yet green. But we're not in the red phase. And for example, we do have territories and regions that are up and positive. We are launching the new products. And we are back in the office, but we're not at 100% in both facilities while we ramp up, again, manufacturing to full production.</p>, <p>That being said, you will have and we do have territories that are moving a bit back into the red relative to some of the access into the hospitals. And you have some areas that are moving forward into green. We're very pleased, as I announced. We're back in July reenrolling again and reactivated sites for the STEMI DTU study. So that's a positive, but we're not at every center yet. So until we get to every center, until we get to the we're no longer seeing some of the flare-ups or the ICU constraints, we're not in the green phase.</p>, <p>But we're able to look at territories and say, by the end of this quarter, we will have territories that are green, and we will have certain territories that maybe flip back to red and hopefully get out of it as fast as we can. We're also pleased that the societies and the government agencies have really stressed the importance to treat high-risk essential emergency patients. Most of our patients have an imminent risk of death if they're not treated, and therefore, they're putting in the processes and the protocols into the hospitals. And many of the hospitals give us access, but even if we don't have direct access into the room, we do with our call center. And again, with Impella Connect, we're managing and monitoring these patients real-time in the cloud.</p>, <p><strong>Chris Pasquale</strong> -- <em>Guggenheim -- Analyst</em></p>, <p>Thanks.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Our next question comes from Danielle Antalffy from SVB Leerink. Your line is open.</p>, <p><strong>Danielle Antalffy</strong> -- <em>SVB Leerink -- Analyst</em></p>, <p>Hi. Good morning, everyone. Thank you so much for taking the question. Just a question on the COVID impact in the quarter. More specifically, the potential positive sales impact with the EUA for RP. I appreciate the left heart did not come until this month or very recently, so no impact there. Any way to quantify sort of how much of sales was tied to COVID patients?</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Abiomed. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-18182", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ABMD"], "primary_tickers_companies": ["ABIOMED, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Abiomed Inc (ABMD) Q1 2021 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 83, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-18182"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-18182", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ABMD"], "primary_tickers_companies": ["ABIOMED, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Abiomed Inc (ABMD) Q1 2021 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 83, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ABMD earnings call for the period ending June 30, 2020. | Ladies and gentlemen, thank you for standing by, and welcome to the Abiomed First Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Todd Trapp. Sir, you may begin.\n Thanks, Crystal, and good morning, and welcome to Abiomed's first quarter fiscal year 2021 earnings conference call. This is Todd Trapp, Vice President and Chief Financial Officer. And we're here with Mike Minogue, Abiomed's Chairman, President and Chief Executive Officer. The format for today's call will be as follows. First, Mike will discuss the first quarter business and operational highlights, and then I'll review our financial results, which are outlined in today's press release. After that, we will open the call to your questions. Before we begin, I would like to remind everyone that today's call includes forward-looking statements. The company cautions investors that any forward-looking statements involves risks and uncertainties and are not a guaranteed in the future. Actual results may differ materially due to a variety of factors identified in our earnings press release, and our most recent 10-K and 10-Q filed with the SEC. We do not undertake any obligation to update forward-looking statements. With that, let me turn the call over to Abiomed's Chairman, President and Chief Executive Officer, Mike Minogue.\n Thank you, Todd and good morning, everyone. The COVID-19 pandemic has sharpened our sense of responsibility and commitment to patients and our communities. We've had to work harder and smarter during this health crisis, and I am grateful and impressed by the way in which our employees and customers have risen and given their best to meet these unprecedented challenges. During Q1, we prioritized keeping our employees safe, supporting our patients and manufacturing our life-saving heart pumps, while investing in innovation. Coronavirus has brought changes to our operations, but our focus and the core of what we do remains the same: improving outcomes for our patients with innovation and strong execution. At Abiomed, our four principles, operating procedures and patients-first culture, enable us to lead, manage, adapt and execute, especially in challenging times. We achieved our Q1 goals, including monthly sequential growth, regulatory milestones and advanced our innovation and education. Our disciplined execution in Q1 delivered one of our most productive quarters in my 16-year tenure with the company. Despite the impact of the pandemic on our commercial organization in Q1, Abiomed delivered $165 million in revenue, down 21% year-over-year. Within the quarter, we achieved monthly sequential growth in April, May and June and 4% year-over-year growth in revenue in June overall.\n In June, patients and revenue increased year-over-year in the U.S., Europe and Japan, as countries began to reopen and hospital restrictions were eased on high-risk, urgent and emergent patients. Abiomed remained productive and relevant in the field by supporting cases and actively educating physicians through videoconferences and broadcasting live cases with expert panels. We successfully controlled costs and expenses driving a solid 21% operating margin, while continuing to invest $26 million in research and innovation. Our balance sheet remains robust with nearly $600 million in cash and zero debt, and our patent portfolio now contains 884 patents and 759 patent spending. For today's call, I will cover the transition from our Q1 red phase to our Q2 yellow phase and our transformation into Abiomed 2.0 in fiscal 2021. We are investing in and executing on our plan for innovation, driving smaller, smarter, more connected products along with strengthening our training, education, and clinical evidence. As we discussed on our last earnings call, for the fiscal year, we designated a three-phase red, yellow, green plan, challenging realities of the COVID-19 environment. We called Q1 red because the broad state of restrictions on elective cases and limited access to most hospitals along with limitations on travel, in-person meetings, and normal headquarters operations.\n In Q1, we focused on completing the SmartAssist console upgrades and accelerating the rollout of Impella Connect. Both technologies help treatment ease of use and potentially improve outcomes. We now have 1,025 sites with SmartAssist and 257 U.S. sites online with Impella Connect, more than doubling the number of connected accounts since March. Additionally, 402 sites already have the hardware on the console, and we only need hospital Wi-Fi permission to activate the Impella Connect account. Impella Connect allows Abiomed personnel to monitor the Impella console in the cloud and interact with the medical providers remotely on topics, such as hemodynamics, alarm management and winning capabilities. Our transition to Abiomed 2.0 encompasses online everything or moving a large portion of business activities to an online connected format that includes management reviews, customer service, and virtual training and education for customers and employees. An example of Abiomed 2.0 execution in Q1 was our team's ability to stay connected with doctors and customers throughout the pandemic, providing education and training virtually.\n Within the quarter, we reached roughly 950 doctors through online professional education and training. Additionally, on a weekly basis, we connected with anywhere from 60 to 150-plus cardiologists and cardiac surgeons to identify lessons learned in treating patients with cardiogenic shock, myocarditis, COVID-19, and organ failure. We have been reviewing and collecting specific case studies on Impella and ECMO support for patients with and without COVID-19. As a result of our ability to adapt and track data in our clinical databases, we were able to receive FDA emergency youth authorization for ECPella this week, which further validates the unloading benefit of Impella with ECMO support for patients in shock requiring oxygenation. Another important 2.0 milestone was the launch of CAMP PCI, our largest training and education initiative in company history. We recruited an esteemed faculty of physicians, launched a cutting-edge platform and held a successful virtual users meeting on June 5th, attended by physicians from the United States and Europe. CAMP PCI leverages advanced digital content, such as live virtual weekly cases and proctorships from world-renowned interventional cardiologists. We remain focused on establishing CAMP PCI and the user group as the best online in interactive education and training resource in cardiology.\n Moving on to product pipeline. In May, we shifted to the full market release of Impella 5.5 with SmartAssist and our expanded surgical organization. At the end of the quarter, the Impella 5.5 was in 86 U.S. sites and more than half are online with Impella Connect. We will continue to launch this 5.5 product with a goal of nearly 100% of the consoles on Impella by the year-end. Clinical data on the first 55 patients treated with the Impella 5.5 with SmartAssist published in the July edition of the American Society of Artificial Internal Organs or SIO, found 84% of patients survived to explant with 76% of survivors having native heart recovery, which is impressive for chronic heart failure patients. It is exciting to see real-world data demonstrating improved survival rates and the benefit of 5.5 unloading for acutely decompensating heart failure patients in cardiogenic shock. Now turning to the regulatory progress. On May 29, we received FDA Emergency Use Authorization for Impella RP to treat COVID-19 patients with right heart failure from pulmonary embolism. Since the onset of the pandemic, the Impella RP has become a therapeutic choice for clinicians treating certain COVID-19 patients suffering right heart failure. This EUA further validates the value of this life-saving product for those patients.\n On May 30th, we received FDA approval for the Impella ECP early feasibility study in the U.S. The prospective multicenter, nonrandomized early feasibility study will allow Abiomed, the study investigators and the FDA to test the device in the U.S. and assess safety and feasibility in high-risk PCI patients. We look forward to beginning enrollment later this calendar year. Moving on to Q2. We have transitioned to our yellow phase, and our manufacturing facilities in Aachen, Germany and Denver, Massachusetts are moving back to full production. During this phase, we've began to see the return of cardiogenic shock protocols and protected PCI procedures in most hospitals and geographies. With that said, we have seen resurgence in COVID cases in certain areas across the globe and in the U.S., which may impact patient access and treatment. Overall, we believe hospitals are better prepared to handle the resurgence of COVID-19 patients, currently due to the availability of testing and more preventative and safety measures in place versus the peak in April.\n In addition, physician societies, hospitals and government agencies are communicating and publishing guidelines on the management of patients with cardiovascular risk factors. These heart failure patients with or without COVID-19 are essential, high risk, emergent and at risk of death, if not treated in a timely manner. Extensive guidelines and physician statements have been published by U.S. and European societies, as well as CMS and other government agencies around the globe. For example, a paper recently published in JACC summarizes guidance from 15 North American cardiovascular societies on the safe reintroduction of cardiovascular services during the COVID-19 pandemic. As a result, hospital systems are providing more timely and improved care for high-risk emergency cardiovascular heart failure patients. Abiomed will continue to provide 24/7 support on-site, on-call and online, while working to improve outcomes for the growing epidemic and increasing mortality of heart failure from coronary artery disease, obesity, Type two diabetes, myocarditis and now COVID-19.\n The U.S. population 65-plus years of age is increasing 44% by 2030 and per a JAMA study, mortality is also increasing for both the 65-plus and the 45 to 65-year-old populations. No other company in med-tech is focused on the science and therapy of unloading the heart and recovering the myocardium. With our Breethe acquisition, we are now uniquely positioned to address, in the future, respiratory failure and combination heart and lung therapy with ECPella as well. I would like to share a story about one of our recent patients. Devon Smith [Phonetic], a 42-year-old warehouse worker from Pennsylvania. He began experiencing flu-like symptoms, muscle aches and difficulty breathing. Devon was transported by ambulance to Mercy Fitzgerald Hospital in Darby, PA, where he was diagnosed with COVID-19, multi-organ failure, severe myocarditis and respiratory failure. With his ejection fraction dangerously ejection fraction dangerously low at 5%, interventional cardiologist, Dr. John Finley inserted the Impella CP to allow Devon's heart to rest and recover. Physicians also placed venous arterial, or VA ECMO, to combat the respiratory effects of COVID-19. Shortly after Devon was transferred to the hospital of the University of Pennsylvania, in Philadelphia. After four days on Impella CP and ECMO support called ECPella, Devon's heart showed dramatic improvement and the Impella and ECMO devices were weaned and explanted. Devon returned home after three weeks in the hospital with his native heart functioning normally at 60% to 65% EF. He is now back at work and looks forward to spending more time with family and working on his car.\n This remarkable story represents great care, a life saved and one of the most cost-effective treatments in healthcare, because it eliminates some of the most expensive and invasive surgeries costing over $0.5 million in hospital charges within six months. These lower costs with quality of life helped both the patient and the insurance provider, which was Blue Cross Blue Shield. Now looking toward the remainder of fiscal 2021. We are focused on our goals as we rebuild Abiomed 2.0. We continue to invest in advanced pipeline technologies including the XR Sheath, Impella ECP, Impella Connect, Impella BTR and new AI algorithms. We remain on track to bring the XR Sheath, an expandable and recordable sheath, that allows for a nine French closure device to the market with Impella 2.5 through a limited market release in our fiscal Q3. Our Breethe ECMO technology remains on track for a 510(k) clearance by the end of the fiscal year. We continue to drive an accelerated rollout of Impella Connect and recently received FDA approval for data streaming from the Impella Connect console, which means console data can be streamed live via Impella Connect to a HIPAA-compliant secure server, where AI will provide predictive clinical information to physicians in the future.\n Turning to clinical data. We began reenrolling patients in our STEMI DTU randomized controlled trial in July. We have recently enrolled five patients and reactivated five sites, totaling 21 patients at 13 hospitals to date. We continue to advance the PROTECT IV RCT study and physician recruitment for the Steering committee has been completed. In the fall, we are planning to release and publish the final data from PROTECT III, which will total over 1,000 patients. The favorable interim report on 898 patients was presented at late-breaking science at TCT in September 2019 last year. PROTECT III is the ongoing prospective single-arm FDA post-approval study for the PMA approval of Impella 2.5 and Impella CP in high-risk PCI. The PROTECT series of studies now represents the largest and most comprehensive study of approximately 1,500 patients treated for high-risk PCI with clinical data reviewed by the FDA from years 2006 to present. Overall, we expect to have multiple meaningful publications this fiscal year. Before I conclude, I want to highlight and recognize the positive real-world interim data on 819 Japanese patients from a multicenter prospective study conducted by The Council for Clinical Use of Ventricular Assist Device Related Academic Societies and the PMDA in Japan. The study conducted at 109 hospitals with oversight by 10 Japanese professional societies found that the use of Impella was associated with a 77% survival rate at 30 days in AMI, cardiogenic shock patients.\n Other findings from the study included that the Impella therapy is highly effective treatment for myocarditis with an 88% survival rate at 30 days. The study's findings about the use of best practices are consistent with other published investigator-led studies, such as national cardiogenic shock initiative study and the Inova shock study that have demonstrated significant increases in survival with the use of Impella best practice protocols compared to the historical survival rate for cardiogenic shock at 50%. In conclusion, I'm proud of Abiomed's execution, delivering on our Q1 red phase commitments and maintaining our focus to recover hearts and save lives. We supported each other, our customers and our patients. We achieved sequential improvements in revenue and patients, strengthened our clinical data, and advanced our pipeline technology.\n Our operational accomplishments in Q1 span the global organization and position our company for success for many years to come. As we progress through the Q2 yellow phase, we know that we must remain focused and adapt to the ever-changing environment with speed in execution. Again, I would like to express my deepest appreciation for our appreciation for our teams across the company and for our customers. I would also like to thank our shareholders for their continued support. We will make fiscal 2021 one of the most productive and transformative years for the company, as we build Abiomed 2.0 and continue to innovate products that are smaller, smarter, and more connected, while we pursue studies for Class I guidelines.\n I will now turn the call over to Todd.\n Thank you, Mike and thanks, everyone, for joining the call for joining the call today. I hope you and your families are staying safe. During our last quarter call, we talked about the actions we were taking to be prepared for the dynamics of the COVID-19 environment. Those preparations served us well, and as Mike described, we're navigating the near-term challenges, while keeping a focus on the long-term. The negative effects of the pandemic resulted in Q1 revenue of $165 million, down 21% versus prior year. We felt the impact of the environment most intensely in April in terms of the decline in patients and revenue from the shelter-in-place restrictions and limitations on hospital procedures in most countries.\n As Mike mentioned, we saw sequential improvement globally in May and June as restrictions were lifted and limitations eased. In the month of June specifically, we delivered year-over-year global revenue growth of 4%, driven by growth in both patients and revenue in the U.S., Europe, and Japan. We believe we experienced some positive lift in June, as some patients, who had deferred treatment in April and May, began to come back into the system. For your reference, we have provided a slide in our investor package, slide three, which breaks out reported revenue and patient performance by month and by geography. In the U.S., we delivered revenue of $135 million, down 23% year-over-year, driven by a 22% decline in patient utilization.\n The Northeast and California declined the most from an otherwise broad-based decline in utilization in the quarter. U.S. revenue grew 3% in the month of June. In the U. S., at the end of June, the Impella 2.5 and CP have reached 1,451 sites. The Impella 5.0 has been placed in 653 sites, and the RP is in 538 sites. The Impella 5.5 with SmartAssist is now in 86 sites. We continue to receive very positive feedback from the surgeons on this innovative technology as well innovative technology as well as positive real-world clinical data on outcomes. In the quarter, the reorder rate was just shy of 100%. Average combined inventory at the hospitals for the Impella 2.5 and CP was approximately 4.6 units per site, basically in line with the inventory levels we saw last quarter. Outside the U.S., revenue totaled $30 million, down 6% on constant currency due to the negative impact of COVID-19 across all regions. Our European revenue decreased 10% on constant, driven by weakness in Germany, France and the Benelux region. Specifically, German revenue was down 9% in the quarter, driven by softness in high-risk PCI. For the month of June, revenue in Germany and Europe was flat and up 5%, respectively, on a year-over-year basis.\n In Japan, we delivered $9 million in revenue in Q1, up 3% on constant currency due to the impact of COVID-19 and lower site openings. This quarter, we opened 13 new sites, nine fewer than a year ago. As a reminder to investors, we front-loaded site openings in the first half of last year to allow the local team to focus on the post-approval study in a broader CP launch. Similar to other regions, Japan did see a recovery within the quarter as revenue in the month of June increased 22% year-over-year. Gross margin was 78.2% in the quarter, compared to 82.1% in the prior year. The year-over-year variance was primarily driven by lower production volume and some incremental costs to accelerate the Impella Connect rollout.\n As Mike mentioned, one of the objectives of the Q1 red phase was to continue to invest in innovation, while being fiscally responsible. In the first quarter, R&D expense totaled $26 million, an increase of 11% versus prior year. We invested in small bore devices, specifically the XR sheath and ECP and in clinical studies including STEMI DTU and PROTECT IV to support our long-term sustainable growth. SG&A expenses for the first quarter totaled $68 million, down 21% versus prior year. The variance was driven by our emphasis on lower discretionary expenses, executive and management salary reductions, reduced work schedules and lower stock-based compensation in the quarter. Q1 operating income was $34 million, translating to an operating margin of 20.7% versus 29.2% in the prior year. The year-over-year margin performance was primarily was primarily driven by lower volume in our ongoing growth investments despite the favorable impact of the cost actions we implemented. GAAP net income for Q1 was $45 million or $0.98 per diluted share versus $1.93 in Q1 fiscal year 2020. The year-over-year performance was driven by lower volume, a mark-to-market adjustment on our Shockwave investment and our tax rate. In Q1, our reported tax rate was 27% versus 14% in the prior year, driven by lower excess tax benefits associated with equity compensation.\n Our balance sheet remains very strong. We generated $32 million of operating cash flow in the quarter, and we ended June with a cash balance of nearly $600 million, up 13% over last year with no debt. Our cash balance declined versus fiscal year-end due to the Breethe acquisition. We continue to be disciplined and have the capital necessary to stay focused on innovation in the long term. The COVID pandemic is still very fluid and continues to evolve differently across geographies. We believe we are likely to continue to experience variable impacts on our business based on some of the surgeons that is occurring in cities across the globe. Given the uncertainty in the environment and consistent with our comments last quarter, we're not in position to provide full year guidance at this time.\n However, to provide transparency to our investors during this period of COVID resurgence, we will provide insight into our July preliminary results. For the month of July, we reported approximately 8% global revenue growth year-over-year, potentially augmented by timing of reorders, favorable sales mix and foreign exchange. However, U.S. patient utilization for the month of July was down approximately 4% year-over-year, driven by a resurgent in COVID cases across select areas, such as Florida, Texas and California. Japan has also seen a resurgence in COVID cases, which has impact on utilization, resulting in single-digit patient growth for the month. Abiomed has a benefit of patient visibility by hospital, by physician and by indication through our on site, on call and online tracking included in our IQ database and Impella Connect platform. We will continue to monitor the fluid situation and will provide updates as necessary.\n In conclusion, while Q1 was a challenging quarter, we are very pleased with our operational performance and our sequential improvement in both revenue and patients as we transition to the Q2 yellow phase. We still face short-term uncertainties given the depth and unknown duration of the pandemic, and we are focused on the actions we can take and what we can control. We will continue to be agile, which allows us to adapt and execute quickly and remain focused on our fiscal year 2021 goals. We are confident in our overall strategy in the significant opportunities ahead for Abiomed.\n With that, operator, please now open the line for questions.\n | Abiomed Inc | (NASDAQ:ABMD) | Aug 6, 2020 | 8:00 a.m. ET | 8 | am | 2020-08-06 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | Our balance sheet remains very strong. | Our balance sheet remains very strong. | [0.7689605 0.00856946 0.22247015] | positive | 0.760391 | 2020-08-07 | 317.040009 | 318.459991 | 308.484406 | 314.980011 | 441436.0 | 310.480011 | 316.880005 | 307.440002 | 310.820007 | 445410.0 | Health Care | 2020-06-30 | 2020-06-30 | 0.98 | 0.299768 | 2020-06-30 | ABMD | 0.680232 | beat | -6.220001 | decrease | 0 | positive |
| 5 | ACEL | /earnings/call-transcripts/2020/08/07/accel-entertainment-inc-acel-q2-2020-earnings-call.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Accel Entertainment, Inc.</strong> <span class="ticker" data-id="342239">(<a href="https://www.fool.com/quote/nyse/accel-entertainment-inc/acel/">NYSE:ACEL</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">10:00 p.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the Accel Entertainment Q2 2020 Earnings Call. [Operator Instructions] [Operator Instructions]</p><p>I would like to now hand the conference over to Brian Carroll. Please go ahead.</p><p><strong>Mathew Ellis</strong> -- <em>Senior Vice President of Corporate Strategy</em></p><p>Welcome to Accel Entertainment's Second Quarter 2020 Earnings Call. Participating on the call today Andy Rubenstein, Accel's Chief Executive Officer; and Brian Carroll, Accel's Chief Financial Officer. Please refer to our website for the press release and supplemental information that will be discussed on this call. Today's call is being recorded and will be available on our website under events and presentations within the Investor Relations section of our website. Some of the comments on today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and the current health conditions.</p><p>Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release available on our website as well as other risk factor disclosures in our filings with the SEC. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website.</p><p>I will now turn the call over to Mr. Andy Rubenstein.</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Thanks, Matt. Good morning, everyone. Thank you for joining us for Accel's Second Quarter 2020 Earnings Call. It was a very quiet quarter due to the statewide shutdown, but we have seen strong results since video gaming relaunched. As a reminder, on March 16, the Illinois Gaming Board shut down all video gaming terminals across the state of Illinois. In late June, the IGB announced gaming would relaunch on July one and issued protocols requiring one of the following actions: VGTs to be spaced six feet apart or dividers to be installed between VGTs or if options one and two cannot be achieved, disable the VGT.</p><p>Once again, the Accel team went above and beyond preparing for relaunch, and we are pleased to report that we had a successful first month. We brought back most of our employees a little more than a week before our locations could reopen. And on day 1, more than 80% of locations were live and by day three, more than 90% of locations were live. In addition, less than 3% of our VGTs were disabled due to the IGB protocols. More importantly, our players were also excited for gaming to resume, and July gaming revenue was near our pre-COVID-19 budget.</p><p>During the shutdown, our team did an excellent job in maintaining close contact with our business partners to not just understand how we would work with them to implement the new guidelines, but also to help support them in these unprecedented times. We are encouraged by both the recent performance and the limited number of our locations that have closed due to the pandemic. Recent policy decisions in Illinois have also given us confidence that we should be able to avoid a similar statewide shutdown. On July 15, Governor Pritzker further divided Illinois from four regions to 11 regions. We have analyzed the regions and determined no region has more than 20% of Accel's gaming revenue.</p><p>It's also important to note, Chicago, a municipality that prohibits video gaming and has been more impacted by COVID-19 than rest of the state, is a separate region. We will continue to work with the Governor's office, the IGB, local municipalities and our establishment partners to follow the latest COVID-19 ordinances and guidance. During the second quarter, we also announced that we had agreed to acquire Tom's Amusements, a Southeast amusement operator and Master Licensee in the State of Georgia, led by Emily Dunn. The acquisition closed on July 22, and our teams have been busy integrating the company's and working with Emily to grow her brand. This is an important milestone to our vision of expanding nationally.</p><p>The Georgia market is large and underpenetrated, and we believe that the Accel playbook will help us grow the market and allow us to take significant share. We're encouraged by other discussions that additional state expansion may occur even faster than we had previously anticipated. Finally, on June 16, we announced the redemption of all public warrants to purchase shares of our common stock for a redemption exchange rate of 0.25 shares of common stock per public warrant. We followed this announcement several weeks later with an exchange offer to the private warrant holders with the same redemption exchange rate. 94% of the private warrant holders, including myself, and all members of our Board of Directors signed an agreement indicating they would participate in the exchange offer.</p><p>The redemption and exchange offers were made to simplify the company's capital structure and reduce the potential dilutive impact of the company's warrants. Unfortunately, with operations suspended, we recorded minimal revenue and adjusted EBITDA loss of $9 million for the second quarter. However, the strengths of our business model are reflected in these results as we were able to quickly adapt and ensure the long-term prosperity for Accel. Our balance sheet remains strong with net debt of approximately $220 million and total liquidity of $199 million. We emerged from the shutdown in a strong position and look to continue executing our growth plans. With that, I'm going to turn it over to Brian Carroll, our CFO, to walk you through the second quarter results in more detail.</p><p>And then we will open it up for questions.</p><p><strong>Brian M. Carroll</strong> -- <em>Chief Financial Officer</em></p><p>Thank you, Andy. As of June 30, we had 11,108 VGTs in 2,335 locations. Year-over-year increases of 33% and 37%, respectively, and that is probably the right metric to focus on for our growth potential. The small decrease in locations in VGTs from the prior quarter was primarily due to lower-performing locations closing their business due to the impact of COVID-19 as well as the IGB not having two meetings, thus delaying the normal addition of locations. At the end of June, our average residual contract length was approximately 6.8 years, and on a stand-alone basis, excluding Grand River, our residual contract length was approximately seven years.</p><p>With relaunch, we've been able to resume upgrading Grand River's equipment and expect that these improvements will increase the hold per day of these locations. We have installed more than 556 VGTs and expect to install a total of 1,000 by year-end. To date, approximately 8% of our game titles have been updated to higher bet limits. The majority of our VGTs will be receiving additional updates for the remaining game titles during the second half of this year. Of the updates, approximately 50% of our VGTs will acquire an on-site update, which we began this week and expect to complete by year-end.</p><p>We had total revenue for the second quarter of $0.4 million due to the statewide shutdown and an adjusted EBITDA loss of $9 million. Capex remained limited with approximately $0.3 million cash spend in the second quarter compared to $5 million in the second quarter of 2018. Given the pandemic, we deferred purchases, and more importantly, we were able to work with major vendors to defer payments until operations resumed.</p><p>At the end of the second quarter, we had approximately $220 million of net debt, and $199 million of liquidity, consisting of $149 million unrestricted cash and $50 million of revolver availability. We are in full compliance with all our bank covenants. And earlier this week, we executed an amendment to our credit facility, which provides covenant relief through Q1 of 2021 to ensure we have adequate flexibility in the current environment. While this was not necessarily needed, this amendment provides us with the flexibility to continue operating sensibly without the overhang of the shutdown.</p><p>Back to you, Andy.</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Thank you, Brian. With one of the toughest quarters in our company's history behind us, I'm pleased to be focused on continuing our mission to be the leader in route gaming. I have been extremely proud of how the Accel team has responded to the current environment and continue to provide the same great customer service that we have been known for.</p><p>We will now take your questions.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-49093">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-49093');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] Your first question comes from the line of Venkat from S&P Global. Our next question comes from the line of John G. DeCree from Union. Your line is now open.</p><p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p><p>Good morning, good afternoon, everyone. Thanks for taking the questions. I had a couple, I guess, kind of housekeeping items first, Andy. So you mentioned by day three, about 90% of your locations were live. I was curious if you could talk about the balance in the other 10%. What your expectations are there? Or are those eventually going to come back online, have some closed? And just broadly speaking, what's the outlook for those remaining locations?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Thanks, John. As far as the remaining balance, we have experienced a continual growth toward probably 90 the mid-90s, low to mid-90s, locations that are now open. There are some that have closed, and every day, we're one or two are trickling in as not reopening. Our expectation is as some of the locations weren't quite ready to open initially or wanted to wait and see how the recovery in the hospitality industry would occur kind of postponed or open. We're seeing, at the same time, a couple open every day. So although we don't have a target number of where we think the ultimate percentage will be, I think we're slowly kind of migrating up into the mid-90s. And our expectation is that there will be some that don't ever open as we see these closures occurring every day.</p><p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p><p>As a follow up to that, Andy, and it may be a little premature as everyone's still just getting reopening and under social distance and protocols. But have you had any conversations with locations that have previously not considered adding VGTs to their location as an additional source of revenue and would say outlook for kind of new openings or new locations in the state that might come online as they look for maybe new revenue sources given the kind of dining business has been so disruptive?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Our sales team had some pretty good traction in July with new opportunities. And I think we'll continue to see that occur throughout the rest of the year. I would caveat by the caveat that there are the expectation is that there will not be as many new businesses opening up in the next six to nine months until we see some certainty or more certainty on how the pandemic is going to be controlled and whether there's a vaccine that will be implemented later in the year.</p><p>So there have been a few businesses that have decided to add VGTs. We've seen a couple situations where one business closed and a new person takes over the business. And I think that will continue throughout the third and the fourth quarter and into the first quarter. But I don't expect a significant increase in the rate of new business openings occurring over the next six to nine months due to market uncertainty for those small business owners.</p><p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p><p>Yes. That's great. And if I could sneak one last one in, on your view for revenue per day so far hold per day. It's early, but we've heard a lot of talks about the benefits of stimulus checks and expanded unemployment. Wondering if you have a sense on how the trend of kind of coin into the machines is going, if it's been relatively consistent since you've reopened or if you've seen some volatility there? And that's it for me. I'll hop back into the queue.</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Yes. Thanks, John. The I would there has been some consistency. We haven't seen a lot of volatility. And the stimulus and the unemployment does provide a little bit of a lift, I think. The greater impact that we're seeing is that people are not using their disposable income for travel and other types of entertainment, and therefore, normally, July and August are months where there is a lot of travel and there is more of a kind of a drop in our business, I think that's making up for some of the shortfalls in the fact that there are people that are reluctant to go out into public.</p><p>A lot of our players are older, and they still are cautious. And the other thing that's as we stated earlier, there is not as many of the establishments in our portfolio that are open as opposed to what would be a normal time period. So I think the balance of the lack of options or alternative entertainment is balancing out some of the negatives. Thanks for the additional color.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Our next question comes from the line of Stephen Grambling from Goldman Sachs. Your line is now open. Hi, thanks for taking the questions. Maybe looking toward Georgia, what have you learned since the deal closed? And how do you think about the growth rate potential in that region?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Thanks for the question, Stephen. The it's really, really early for us to give any kind of real perspective on it. And I wouldn't anticipate any near-term growth as the current market has some challenges that we're trying to understand. So Georgia is one that we have little near-term expectation, and we're in more of a learning phase and as well as an integration mode.</p><p><strong>Stephen Grambling</strong> -- <em>Goldman Sachs -- Analyst</em></p><p>And then whether it's in Illinois or otherwise, I guess, are you hearing or seeing any kind of operator distress that could create opportunities for their consolidation, either in Illinois or otherwise?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>I would say that we haven't really seen distress. We've seen people interested in partnering with us, and that's always a theme in our business. As far as the operators that kind of are looking for kind of a transition, there's definitely interest, and I wouldn't put it any greater than normal, but we're continuing conversations with a lot of the different operators and opportunities that we've seen over the last year or so, and I think that will continue going forward into the fourth quarter and early next year. And as far as distress, I don't think we've seen that explicitly in the marketplace.</p><p><strong>Stephen Grambling</strong> -- <em>Goldman Sachs -- Analyst</em></p><p>Got it. Thanks so much.</p><p><strong>Operator</strong></p><p>Your next question comes from the line of Venkat from S&P Global. Your line is now open.</p><p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p><p>I'm guessing this is me. Can you hear me, OK?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Yes.</p><p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p><p>Okay. This is Greg Gibas from Northland. So must have had the wrong name in there at some point. So sorry about that. Sorry about the confusion. But we're just hoping to follow-up on a few things. First, I guess, a little bit more color on how July has trended from a hold per day perspective, maybe relative to pre-COVID times? Is there anything you can share there?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Yes. Thanks, Greg. The July numbers, as I mentioned earlier, were pretty strong considering what we were coming out of. And the fact that we didn't have as much of our inventory of locations operating. So the hold per day was consistent with where we thought our business would be in our projections pre-COVID, maybe slightly below because of a lot of the locations not being open. But I think, like as I said, the lack of entertainment alternatives and people staying closer to home, were very advantageous for us in terms of performance.</p><p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p><p>Sure. That makes sense. And then, I guess, could you I think you already provided this on the call, but what percentage have been updated with the new betting limits? And then also the percentage of locations that had their six VGT installed at this point?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>So the as far as the betting limits are concerned, we have installed in the IGT portfolio, the basic software upgrade that was provided through the system update pretty much throughout the portfolio. That was only a few games, not the entire portfolio of games on each machine. The rest of that portfolio has not been updated. As it was just recently released, we're in the process of doing that. So on a given machine only, call it, 10% to 15% of the games have the higher bet limits and the bigger jackpots. We'll see that on the IGT portfolio increase pretty rapidly over the next six to eight weeks. The SCi Games software is very different.</p><p>And that needs to be loaded on to each individual machine by visiting location. You can't do it through the central system. So very, very few have experienced that upgrade. And the expectation is, it will take some time probably into the fourth quarter before those machines all get upgraded. So it's a process. I don't think we've gotten anywhere close to a critical mass on that upgrade and probably we'll give you better insight at the end of the third quarter. Then what's the second part of your question?</p><p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p><p>It was the percentage that have had their six VGT installed?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>So I think we're probably in a somewhere between 25% to 35% that will accomplish by the end of the third quarter. I mean it's a very dynamic number that obviously increases every day. And you'll see that lift as you monitor the amount of machines the monthly report that comes out from the IGB, you'll see our numbers increase.</p><p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p><p>Okay. Got it. That's helpful, Andy. And I guess the last one from me. Just to be a follow-up on the general health of your establishment partners, I know you already said that on day three, they were 90% open again, which is pretty good. I guess I would just ask, how many do you think will maybe permanently go out of business? I imagine you're pretty close with their health, maybe day-to-day or at least month-to-month. And then maybe with respect to the pace of new licenses being issued from the IGB, I mean, how do you think that will be impacted by the shut down?</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>The total amount of locations that won't come back is obviously a guess. What we saw during the pandemic was a lighter amount of business closures than normal. And I think that's attributed to the fact that a lot of the locations were receiving government support. So they stayed open while they were they refused they didn't declare their closure during that time in order to receive the government support. So on a normal basis, we lose, call it, seven to 10 locations that are closing every month, just in the course of our normal business.</p><p>That was a light we experienced a lighter number in the pandemic period of closure. We're now starting to see slightly accelerated as some of those locations are making declaration that they're not reopening. I think we'll see that impact probably through the first quarter of 2021 as locations will make the effort of trying to reopen and see how the business goes. Usually, January is a high closure month as businesses want to get through the holidays kind of as a last draw. And so I think you'll see a higher-than-normal closure rate beginning, let's say, this month through probably the end of February.</p><p><strong>Operator</strong></p><p>There are no further questions at this time. I will turn the call back over to Andy Rubenstein.</p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p>Okay. Well, thank you, everyone, for joining the call. We look forward to continuing to help our small business partners reopen their business. Just in fact, just survive in this period because obviously, they are restrained in the ability to serve indoors. And fortunately, this is occurring during a warmer weather period that a lot of them are expanded their outdoor service. And so the gaming has helped supplement that revenue. And we look forward to updating you after the third quarter with kind of continual growth. And hopefully, everyone stays healthy and safe and wears their masks because that is essential to the support of a lot of these small businesses. So thank you for taking the time, and we look forward to talking to you in a few months.</p><p><strong>Operator</strong></p><p>Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.</p><p><strong>Duration: 29 minutes</strong></p><h2>Call participants:</h2><p><strong>Mathew Ellis</strong> -- <em>Senior Vice President of Corporate Strategy</em></p><p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p><p><strong>Brian M. Carroll</strong> -- <em>Chief Financial Officer</em></p><p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p><p><strong>Stephen Grambling</strong> -- <em>Goldman Sachs -- Analyst</em></p><p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/acel">More ACEL analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Accel Entertainment, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAccel%2520Entertainment%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=7622d6e3-f3c9-4e5c-8d7d-8e00945d5d40">ten best stocks</a></strong> for investors to buy right now… and Accel Entertainment, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAccel%2520Entertainment%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=7622d6e3-f3c9-4e5c-8d7d-8e00945d5d40" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-33084", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ACEL"], "primary_tickers_companies": ["Accel Entertainment, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Accel Entertainment, Inc. (ACEL) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 89, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-33084"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-33084", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ACEL"], "primary_tickers_companies": ["Accel Entertainment, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Accel Entertainment, Inc. (ACEL) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 89, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ACEL earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Accel Entertainment, Inc.</strong> <span class="ticker" data-id="342239">(<a href="https://www.fool.com/quote/nyse/accel-entertainment-inc/acel/">NYSE:ACEL</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">10:00 p.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the Accel Entertainment Q2 2020 Earnings Call. [Operator Instructions] [Operator Instructions]</p>, <p>I would like to now hand the conference over to Brian Carroll. Please go ahead.</p>, <p><strong>Mathew Ellis</strong> -- <em>Senior Vice President of Corporate Strategy</em></p>, <p>Welcome to Accel Entertainment's Second Quarter 2020 Earnings Call. Participating on the call today Andy Rubenstein, Accel's Chief Executive Officer; and Brian Carroll, Accel's Chief Financial Officer. Please refer to our website for the press release and supplemental information that will be discussed on this call. Today's call is being recorded and will be available on our website under events and presentations within the Investor Relations section of our website. Some of the comments on today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and the current health conditions.</p>, <p>Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release available on our website as well as other risk factor disclosures in our filings with the SEC. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website.</p>, <p>I will now turn the call over to Mr. Andy Rubenstein.</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Thanks, Matt. Good morning, everyone. Thank you for joining us for Accel's Second Quarter 2020 Earnings Call. It was a very quiet quarter due to the statewide shutdown, but we have seen strong results since video gaming relaunched. As a reminder, on March 16, the Illinois Gaming Board shut down all video gaming terminals across the state of Illinois. In late June, the IGB announced gaming would relaunch on July one and issued protocols requiring one of the following actions: VGTs to be spaced six feet apart or dividers to be installed between VGTs or if options one and two cannot be achieved, disable the VGT.</p>, <p>Once again, the Accel team went above and beyond preparing for relaunch, and we are pleased to report that we had a successful first month. We brought back most of our employees a little more than a week before our locations could reopen. And on day 1, more than 80% of locations were live and by day three, more than 90% of locations were live. In addition, less than 3% of our VGTs were disabled due to the IGB protocols. More importantly, our players were also excited for gaming to resume, and July gaming revenue was near our pre-COVID-19 budget.</p>, <p>During the shutdown, our team did an excellent job in maintaining close contact with our business partners to not just understand how we would work with them to implement the new guidelines, but also to help support them in these unprecedented times. We are encouraged by both the recent performance and the limited number of our locations that have closed due to the pandemic. Recent policy decisions in Illinois have also given us confidence that we should be able to avoid a similar statewide shutdown. On July 15, Governor Pritzker further divided Illinois from four regions to 11 regions. We have analyzed the regions and determined no region has more than 20% of Accel's gaming revenue.</p>, <p>It's also important to note, Chicago, a municipality that prohibits video gaming and has been more impacted by COVID-19 than rest of the state, is a separate region. We will continue to work with the Governor's office, the IGB, local municipalities and our establishment partners to follow the latest COVID-19 ordinances and guidance. During the second quarter, we also announced that we had agreed to acquire Tom's Amusements, a Southeast amusement operator and Master Licensee in the State of Georgia, led by Emily Dunn. The acquisition closed on July 22, and our teams have been busy integrating the company's and working with Emily to grow her brand. This is an important milestone to our vision of expanding nationally.</p>, <p>The Georgia market is large and underpenetrated, and we believe that the Accel playbook will help us grow the market and allow us to take significant share. We're encouraged by other discussions that additional state expansion may occur even faster than we had previously anticipated. Finally, on June 16, we announced the redemption of all public warrants to purchase shares of our common stock for a redemption exchange rate of 0.25 shares of common stock per public warrant. We followed this announcement several weeks later with an exchange offer to the private warrant holders with the same redemption exchange rate. 94% of the private warrant holders, including myself, and all members of our Board of Directors signed an agreement indicating they would participate in the exchange offer.</p>, <p>The redemption and exchange offers were made to simplify the company's capital structure and reduce the potential dilutive impact of the company's warrants. Unfortunately, with operations suspended, we recorded minimal revenue and adjusted EBITDA loss of $9 million for the second quarter. However, the strengths of our business model are reflected in these results as we were able to quickly adapt and ensure the long-term prosperity for Accel. Our balance sheet remains strong with net debt of approximately $220 million and total liquidity of $199 million. We emerged from the shutdown in a strong position and look to continue executing our growth plans. With that, I'm going to turn it over to Brian Carroll, our CFO, to walk you through the second quarter results in more detail.</p>, <p>And then we will open it up for questions.</p>, <p><strong>Brian M. Carroll</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you, Andy. As of June 30, we had 11,108 VGTs in 2,335 locations. Year-over-year increases of 33% and 37%, respectively, and that is probably the right metric to focus on for our growth potential. The small decrease in locations in VGTs from the prior quarter was primarily due to lower-performing locations closing their business due to the impact of COVID-19 as well as the IGB not having two meetings, thus delaying the normal addition of locations. At the end of June, our average residual contract length was approximately 6.8 years, and on a stand-alone basis, excluding Grand River, our residual contract length was approximately seven years.</p>, <p>With relaunch, we've been able to resume upgrading Grand River's equipment and expect that these improvements will increase the hold per day of these locations. We have installed more than 556 VGTs and expect to install a total of 1,000 by year-end. To date, approximately 8% of our game titles have been updated to higher bet limits. The majority of our VGTs will be receiving additional updates for the remaining game titles during the second half of this year. Of the updates, approximately 50% of our VGTs will acquire an on-site update, which we began this week and expect to complete by year-end.</p>, <p>We had total revenue for the second quarter of $0.4 million due to the statewide shutdown and an adjusted EBITDA loss of $9 million. Capex remained limited with approximately $0.3 million cash spend in the second quarter compared to $5 million in the second quarter of 2018. Given the pandemic, we deferred purchases, and more importantly, we were able to work with major vendors to defer payments until operations resumed.</p>, <p>At the end of the second quarter, we had approximately $220 million of net debt, and $199 million of liquidity, consisting of $149 million unrestricted cash and $50 million of revolver availability. We are in full compliance with all our bank covenants. And earlier this week, we executed an amendment to our credit facility, which provides covenant relief through Q1 of 2021 to ensure we have adequate flexibility in the current environment. While this was not necessarily needed, this amendment provides us with the flexibility to continue operating sensibly without the overhang of the shutdown.</p>, <p>Back to you, Andy.</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Thank you, Brian. With one of the toughest quarters in our company's history behind us, I'm pleased to be focused on continuing our mission to be the leader in route gaming. I have been extremely proud of how the Accel team has responded to the current environment and continue to provide the same great customer service that we have been known for.</p>, <p>We will now take your questions.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-49093">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-49093');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Your first question comes from the line of Venkat from S&P Global. Our next question comes from the line of John G. DeCree from Union. Your line is now open.</p>, <p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p>, <p>Good morning, good afternoon, everyone. Thanks for taking the questions. I had a couple, I guess, kind of housekeeping items first, Andy. So you mentioned by day three, about 90% of your locations were live. I was curious if you could talk about the balance in the other 10%. What your expectations are there? Or are those eventually going to come back online, have some closed? And just broadly speaking, what's the outlook for those remaining locations?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Thanks, John. As far as the remaining balance, we have experienced a continual growth toward probably 90 the mid-90s, low to mid-90s, locations that are now open. There are some that have closed, and every day, we're one or two are trickling in as not reopening. Our expectation is as some of the locations weren't quite ready to open initially or wanted to wait and see how the recovery in the hospitality industry would occur kind of postponed or open. We're seeing, at the same time, a couple open every day. So although we don't have a target number of where we think the ultimate percentage will be, I think we're slowly kind of migrating up into the mid-90s. And our expectation is that there will be some that don't ever open as we see these closures occurring every day.</p>, <p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p>, <p>As a follow up to that, Andy, and it may be a little premature as everyone's still just getting reopening and under social distance and protocols. But have you had any conversations with locations that have previously not considered adding VGTs to their location as an additional source of revenue and would say outlook for kind of new openings or new locations in the state that might come online as they look for maybe new revenue sources given the kind of dining business has been so disruptive?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Our sales team had some pretty good traction in July with new opportunities. And I think we'll continue to see that occur throughout the rest of the year. I would caveat by the caveat that there are the expectation is that there will not be as many new businesses opening up in the next six to nine months until we see some certainty or more certainty on how the pandemic is going to be controlled and whether there's a vaccine that will be implemented later in the year.</p>, <p>So there have been a few businesses that have decided to add VGTs. We've seen a couple situations where one business closed and a new person takes over the business. And I think that will continue throughout the third and the fourth quarter and into the first quarter. But I don't expect a significant increase in the rate of new business openings occurring over the next six to nine months due to market uncertainty for those small business owners.</p>, <p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p>, <p>Yes. That's great. And if I could sneak one last one in, on your view for revenue per day so far hold per day. It's early, but we've heard a lot of talks about the benefits of stimulus checks and expanded unemployment. Wondering if you have a sense on how the trend of kind of coin into the machines is going, if it's been relatively consistent since you've reopened or if you've seen some volatility there? And that's it for me. I'll hop back into the queue.</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Yes. Thanks, John. The I would there has been some consistency. We haven't seen a lot of volatility. And the stimulus and the unemployment does provide a little bit of a lift, I think. The greater impact that we're seeing is that people are not using their disposable income for travel and other types of entertainment, and therefore, normally, July and August are months where there is a lot of travel and there is more of a kind of a drop in our business, I think that's making up for some of the shortfalls in the fact that there are people that are reluctant to go out into public.</p>, <p>A lot of our players are older, and they still are cautious. And the other thing that's as we stated earlier, there is not as many of the establishments in our portfolio that are open as opposed to what would be a normal time period. So I think the balance of the lack of options or alternative entertainment is balancing out some of the negatives. Thanks for the additional color.</p>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Our next question comes from the line of Stephen Grambling from Goldman Sachs. Your line is now open. Hi, thanks for taking the questions. Maybe looking toward Georgia, what have you learned since the deal closed? And how do you think about the growth rate potential in that region?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Thanks for the question, Stephen. The it's really, really early for us to give any kind of real perspective on it. And I wouldn't anticipate any near-term growth as the current market has some challenges that we're trying to understand. So Georgia is one that we have little near-term expectation, and we're in more of a learning phase and as well as an integration mode.</p>, <p><strong>Stephen Grambling</strong> -- <em>Goldman Sachs -- Analyst</em></p>, <p>And then whether it's in Illinois or otherwise, I guess, are you hearing or seeing any kind of operator distress that could create opportunities for their consolidation, either in Illinois or otherwise?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>I would say that we haven't really seen distress. We've seen people interested in partnering with us, and that's always a theme in our business. As far as the operators that kind of are looking for kind of a transition, there's definitely interest, and I wouldn't put it any greater than normal, but we're continuing conversations with a lot of the different operators and opportunities that we've seen over the last year or so, and I think that will continue going forward into the fourth quarter and early next year. And as far as distress, I don't think we've seen that explicitly in the marketplace.</p>, <p><strong>Stephen Grambling</strong> -- <em>Goldman Sachs -- Analyst</em></p>, <p>Got it. Thanks so much.</p>, <p><strong>Operator</strong></p>, <p>Your next question comes from the line of Venkat from S&P Global. Your line is now open.</p>, <p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p>, <p>I'm guessing this is me. Can you hear me, OK?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Yes.</p>, <p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p>, <p>Okay. This is Greg Gibas from Northland. So must have had the wrong name in there at some point. So sorry about that. Sorry about the confusion. But we're just hoping to follow-up on a few things. First, I guess, a little bit more color on how July has trended from a hold per day perspective, maybe relative to pre-COVID times? Is there anything you can share there?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Yes. Thanks, Greg. The July numbers, as I mentioned earlier, were pretty strong considering what we were coming out of. And the fact that we didn't have as much of our inventory of locations operating. So the hold per day was consistent with where we thought our business would be in our projections pre-COVID, maybe slightly below because of a lot of the locations not being open. But I think, like as I said, the lack of entertainment alternatives and people staying closer to home, were very advantageous for us in terms of performance.</p>, <p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p>, <p>Sure. That makes sense. And then, I guess, could you I think you already provided this on the call, but what percentage have been updated with the new betting limits? And then also the percentage of locations that had their six VGT installed at this point?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>So the as far as the betting limits are concerned, we have installed in the IGT portfolio, the basic software upgrade that was provided through the system update pretty much throughout the portfolio. That was only a few games, not the entire portfolio of games on each machine. The rest of that portfolio has not been updated. As it was just recently released, we're in the process of doing that. So on a given machine only, call it, 10% to 15% of the games have the higher bet limits and the bigger jackpots. We'll see that on the IGT portfolio increase pretty rapidly over the next six to eight weeks. The SCi Games software is very different.</p>, <p>And that needs to be loaded on to each individual machine by visiting location. You can't do it through the central system. So very, very few have experienced that upgrade. And the expectation is, it will take some time probably into the fourth quarter before those machines all get upgraded. So it's a process. I don't think we've gotten anywhere close to a critical mass on that upgrade and probably we'll give you better insight at the end of the third quarter. Then what's the second part of your question?</p>, <p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p>, <p>It was the percentage that have had their six VGT installed?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>So I think we're probably in a somewhere between 25% to 35% that will accomplish by the end of the third quarter. I mean it's a very dynamic number that obviously increases every day. And you'll see that lift as you monitor the amount of machines the monthly report that comes out from the IGB, you'll see our numbers increase.</p>, <p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p>, <p>Okay. Got it. That's helpful, Andy. And I guess the last one from me. Just to be a follow-up on the general health of your establishment partners, I know you already said that on day three, they were 90% open again, which is pretty good. I guess I would just ask, how many do you think will maybe permanently go out of business? I imagine you're pretty close with their health, maybe day-to-day or at least month-to-month. And then maybe with respect to the pace of new licenses being issued from the IGB, I mean, how do you think that will be impacted by the shut down?</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>The total amount of locations that won't come back is obviously a guess. What we saw during the pandemic was a lighter amount of business closures than normal. And I think that's attributed to the fact that a lot of the locations were receiving government support. So they stayed open while they were they refused they didn't declare their closure during that time in order to receive the government support. So on a normal basis, we lose, call it, seven to 10 locations that are closing every month, just in the course of our normal business.</p>, <p>That was a light we experienced a lighter number in the pandemic period of closure. We're now starting to see slightly accelerated as some of those locations are making declaration that they're not reopening. I think we'll see that impact probably through the first quarter of 2021 as locations will make the effort of trying to reopen and see how the business goes. Usually, January is a high closure month as businesses want to get through the holidays kind of as a last draw. And so I think you'll see a higher-than-normal closure rate beginning, let's say, this month through probably the end of February.</p>, <p><strong>Operator</strong></p>, <p>There are no further questions at this time. I will turn the call back over to Andy Rubenstein.</p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p>Okay. Well, thank you, everyone, for joining the call. We look forward to continuing to help our small business partners reopen their business. Just in fact, just survive in this period because obviously, they are restrained in the ability to serve indoors. And fortunately, this is occurring during a warmer weather period that a lot of them are expanded their outdoor service. And so the gaming has helped supplement that revenue. And we look forward to updating you after the third quarter with kind of continual growth. And hopefully, everyone stays healthy and safe and wears their masks because that is essential to the support of a lot of these small businesses. So thank you for taking the time, and we look forward to talking to you in a few months.</p>, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.</p>, <p><strong>Duration: 29 minutes</strong></p>, <h2>Call participants:</h2>, <p><strong>Mathew Ellis</strong> -- <em>Senior Vice President of Corporate Strategy</em></p>, <p><strong>Andy Rubenstein</strong> -- <em>President, Chief Executive Officer and Director</em></p>, <p><strong>Brian M. Carroll</strong> -- <em>Chief Financial Officer</em></p>, <p><strong>John G. DeCree</strong> -- <em>Union -- Analyst</em></p>, <p><strong>Stephen Grambling</strong> -- <em>Goldman Sachs -- Analyst</em></p>, <p><strong>Greg Gibas</strong> -- <em>Northland -- Analyst</em></p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-33084", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ACEL"], "primary_tickers_companies": ["Accel Entertainment, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Accel Entertainment, Inc. (ACEL) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 89, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-33084"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-33084", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ACEL"], "primary_tickers_companies": ["Accel Entertainment, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Accel Entertainment, Inc. (ACEL) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 89, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ACEL earnings call for the period ending June 30, 2020. | I would like to now hand the conference over to Brian Carroll. Please go ahead.\n Welcome to Accel Entertainment's Second Quarter 2020 Earnings Call. Participating on the call today Andy Rubenstein, Accel's Chief Executive Officer; and Brian Carroll, Accel's Chief Financial Officer. Please refer to our website for the press release and supplemental information that will be discussed on this call. Today's call is being recorded and will be available on our website under events and presentations within the Investor Relations section of our website. Some of the comments on today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and the current health conditions.\n Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release available on our website as well as other risk factor disclosures in our filings with the SEC. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website.\n I will now turn the call over to Mr. Andy Rubenstein.\n Thanks, Matt. Good morning, everyone. Thank you for joining us for Accel's Second Quarter 2020 Earnings Call. It was a very quiet quarter due to the statewide shutdown, but we have seen strong results since video gaming relaunched. As a reminder, on March 16, the Illinois Gaming Board shut down all video gaming terminals across the state of Illinois. In late June, the IGB announced gaming would relaunch on July one and issued protocols requiring one of the following actions: VGTs to be spaced six feet apart or dividers to be installed between VGTs or if options one and two cannot be achieved, disable the VGT.\n Once again, the Accel team went above and beyond preparing for relaunch, and we are pleased to report that we had a successful first month. We brought back most of our employees a little more than a week before our locations could reopen. And on day 1, more than 80% of locations were live and by day three, more than 90% of locations were live. In addition, less than 3% of our VGTs were disabled due to the IGB protocols. More importantly, our players were also excited for gaming to resume, and July gaming revenue was near our pre-COVID-19 budget.\n During the shutdown, our team did an excellent job in maintaining close contact with our business partners to not just understand how we would work with them to implement the new guidelines, but also to help support them in these unprecedented times. We are encouraged by both the recent performance and the limited number of our locations that have closed due to the pandemic. Recent policy decisions in Illinois have also given us confidence that we should be able to avoid a similar statewide shutdown. On July 15, Governor Pritzker further divided Illinois from four regions to 11 regions. We have analyzed the regions and determined no region has more than 20% of Accel's gaming revenue.\n It's also important to note, Chicago, a municipality that prohibits video gaming and has been more impacted by COVID-19 than rest of the state, is a separate region. We will continue to work with the Governor's office, the IGB, local municipalities and our establishment partners to follow the latest COVID-19 ordinances and guidance. During the second quarter, we also announced that we had agreed to acquire Tom's Amusements, a Southeast amusement operator and Master Licensee in the State of Georgia, led by Emily Dunn. The acquisition closed on July 22, and our teams have been busy integrating the company's and working with Emily to grow her brand. This is an important milestone to our vision of expanding nationally.\n The Georgia market is large and underpenetrated, and we believe that the Accel playbook will help us grow the market and allow us to take significant share. We're encouraged by other discussions that additional state expansion may occur even faster than we had previously anticipated. Finally, on June 16, we announced the redemption of all public warrants to purchase shares of our common stock for a redemption exchange rate of 0.25 shares of common stock per public warrant. We followed this announcement several weeks later with an exchange offer to the private warrant holders with the same redemption exchange rate. 94% of the private warrant holders, including myself, and all members of our Board of Directors signed an agreement indicating they would participate in the exchange offer.\n The redemption and exchange offers were made to simplify the company's capital structure and reduce the potential dilutive impact of the company's warrants. Unfortunately, with operations suspended, we recorded minimal revenue and adjusted EBITDA loss of $9 million for the second quarter. However, the strengths of our business model are reflected in these results as we were able to quickly adapt and ensure the long-term prosperity for Accel. Our balance sheet remains strong with net debt of approximately $220 million and total liquidity of $199 million. We emerged from the shutdown in a strong position and look to continue executing our growth plans. With that, I'm going to turn it over to Brian Carroll, our CFO, to walk you through the second quarter results in more detail.\n And then we will open it up for questions.\n Thank you, Andy. As of June 30, we had 11,108 VGTs in 2,335 locations. Year-over-year increases of 33% and 37%, respectively, and that is probably the right metric to focus on for our growth potential. The small decrease in locations in VGTs from the prior quarter was primarily due to lower-performing locations closing their business due to the impact of COVID-19 as well as the IGB not having two meetings, thus delaying the normal addition of locations. At the end of June, our average residual contract length was approximately 6.8 years, and on a stand-alone basis, excluding Grand River, our residual contract length was approximately seven years.\n With relaunch, we've been able to resume upgrading Grand River's equipment and expect that these improvements will increase the hold per day of these locations. We have installed more than 556 VGTs and expect to install a total of 1,000 by year-end. To date, approximately 8% of our game titles have been updated to higher bet limits. The majority of our VGTs will be receiving additional updates for the remaining game titles during the second half of this year. Of the updates, approximately 50% of our VGTs will acquire an on-site update, which we began this week and expect to complete by year-end.\n We had total revenue for the second quarter of $0.4 million due to the statewide shutdown and an adjusted EBITDA loss of $9 million. Capex remained limited with approximately $0.3 million cash spend in the second quarter compared to $5 million in the second quarter of 2018. Given the pandemic, we deferred purchases, and more importantly, we were able to work with major vendors to defer payments until operations resumed.\n At the end of the second quarter, we had approximately $220 million of net debt, and $199 million of liquidity, consisting of $149 million unrestricted cash and $50 million of revolver availability. We are in full compliance with all our bank covenants. And earlier this week, we executed an amendment to our credit facility, which provides covenant relief through Q1 of 2021 to ensure we have adequate flexibility in the current environment. While this was not necessarily needed, this amendment provides us with the flexibility to continue operating sensibly without the overhang of the shutdown.\n Back to you, Andy.\n Thank you, Brian. With one of the toughest quarters in our company's history behind us, I'm pleased to be focused on continuing our mission to be the leader in route gaming. I have been extremely proud of how the Accel team has responded to the current environment and continue to provide the same great customer service that we have been known for.\n We will now take your questions.\n | Accel Entertainment, Inc. | (NYSE:ACEL) | Aug 7, 2020 | 10:00 p.m. ET | 10 | pm | 2020-08-07 | 2020-08-10 | 2020-08-07 | 2020-08-11 | NYSE | It was a very quiet quarter due to the statewide shutdown, but we have seen strong results since video gaming relaunched. | It was a very quiet quarter due to the statewide shutdown, but we have seen strong results since video gaming relaunched. | [0.93264425 0.01669624 0.05065957] | positive | 0.915948 | 2020-08-11 | 10.240000 | 10.670000 | 9.620000 | 9.960000 | 530984.0 | 10.060000 | 10.330000 | 9.940000 | 10.070000 | 373377.0 | Hotels, Restaurants & Leisure | 2020-06-30 | 2020-06-30 | -0.17 | -0.173400 | 2020-06-30 | ACEL | 0.003400 | beat | -0.170000 | decrease | 0 | positive |
| 6 | ACIW | /earnings/call-transcripts/2020/08/06/aci-worldwide-inc-aciw-q2-2020-earnings-call-trans.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>ACI Worldwide Inc</strong> <span class="ticker" data-id="205809">(<a href="https://www.fool.com/quote/nasdaq/aci-worldwide-inc/aciw/">NASDAQ:ACIW</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:30 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by and welcome to the ACI Second Quarter Earnings Conference Call. [Operator Instructions]</p><p>I would now like to turn the conference over to your speaker, Mr. John Kraft, Vice President of Investor Relations and Strategy. Thank you. Please go ahead, sir.</p><p><strong>John Kraft</strong> -- <em>Vice President, Investor Relations & Strategic Analysis</em></p><p>[Technical Issues] deck today, a copy of which is available on our website as well as with the SEC.</p><p>On this morning's call is Odilon Almeida, our CEO, and Scott Behrens, our CFO.</p><p>Before I turn it over, I'd like to share the Company management will be attending the Wells Fargo Virtual 5th Annual Technology Services Forum on August 11; the Canaccord 40th Annual Growth Conference, August 12; and the Second Annual Needham Virtual FinTech & Digital Transformation 1X1 Conference on August 19.</p><p>With that, I'd like to turn the call over to Odilon.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you, John, and good morning, everyone.</p><p>Thank you for joining us for our second quarter 2020 earnings conference call. On our last earnings call in May, COVID-19 and unprecedented global impact on people and economies was top of mind and the central focus of our discussion. Now in August, we find ourselves in slightly different circumstances but with many of the same challenges. I hope you and your families are staying safe and well and we at ACI remain committed to doing everything we can to ensure the health, safety and well-being of our employees as we seamlessly support our customers.</p><p>On today's call, I will begin with our second quarter financial results. Importantly, I'd also like to share in more detail my vision for profitable revenue growth and long-term value creation.</p><p>We are living in a different world compared to even three or four months ago. While different parts of the globe are experiencing different stages and levels of severity of the pandemic, undoubtedly there are ways in which our world has changed from [Technical Issues]. As it relates to ACI, the pandemic has heightened awareness and accelerated widespread acceptance of the essential role digital payment systems play in our modern economy.</p><p>Starting with the second quarter, new sales bookings were $136 million, up 6% from Q2 last year. We saw particular strength in our merchant business, signing two larger PSP contracts, RS2 in Europe and Hyperpay in Middle East, that will allow these partners to offer merchant acquiring and e-commerce services to their customers in new geographies. Another area of continued strength in the quarter was real-time. We signed a long-term support agreement with our customer, Rabobank, who was looking to expand its existing real-time payment offering by supporting batch payments. Another existing customer, one of the largest interbank switches in Indonesia, has selected ACI to orchestrate all their alternative payments, including QR, early pay and other real-time offerings. Despite our revenues being impacted by COVID-19, our EBITDA increased by 42% compared to Q2 of 2019 with margin expansion increasing to 35%, up from 25% last year.</p><p>Our efforts to improve operational discipline are working, and we continue to focus on maximizing profitability while advancing our pipeline of deals to position ACI for future continuous, profitable growth.</p><p>As I mentioned last quarter, we are fortunate to have a resilient business model with significant recurring revenue, reliable cash flows and high customer retention, all of which are helping us weather the COVID-19 related uncertainty. On our first quarter call, I shared with you my background and experience in realigning operations toward revenue growth, margin expansion and value creation. I also spoke about time I devoted to speaking with ACI's customers, employees and leaders. Since that time, I have also been getting feedback from our investors. These conversations have made clear to me that ACI has a strong portfolio of customers in software-led payment solutions, and importantly the human capital and talent to succeed.</p><p>On the last earnings call, I have also communicated my initial and high-level perspectives on ACI's growth potential and the three pillars of our strategy which will position the Company for continuous profitable growth. Today, I'm pleased to share additional details on our progress. Over the last few months, we have engaged our best internal experts and industry-leading consultants to help us review our business and intensify opportunities for efficiency gains and growth optimization. These small consultant teams have worked with me on several similar efforts over many years. We have a playbook with a proven track record. Although our work is not complete, we have identified key initiatives to support the three pillars of our strategy that will drive value creation opportunities for ACI.</p><p>Our first pillar, Fit for Growth, is the refining and realignment of our organizational structure and operating model to better position the Company for organic growth. This involves reviewing the organization model and geographic footprint and designing an agile and nimble organization that is better at creating and sustaining continuous profitable organic growth. We are also designing a best-in-class global sales organization and culture. This initiative focuses on execution, and we will strengthen accountability, enhanced transparency and reduced duplicative costs throughout the Company. We are very close to hiring a Chief Revenue Officer and a Chief Human Resources Officer to complete the leadership team.</p><p>Our second pillar is called Focus on Growth. We'll design an organic growth strategy that puts a disciplined focus on areas where we can optimize growth. We are reviewing our current solutions to identify the best opportunities to invest our operating and capital expenditures going forward. We will focus on a smaller set of growth-rich software-led solutions supported by differentiated innovation in specific geographies and market segments. We will ensure all of our priority solutions are cloud-first in terms of architecture, deployment and operations. We will prioritize investments that have the best market opportunities to generate the highest revenue growth and cash flows and would earn the highest ROI. This will become a core discipline here at ACI. Importantly, this investment will come from cost discipline and reallocation, not incremental spend.</p><p>Our third pillar is Step Change Value Creation through M&A. We've also continued to pursue accretive M&A to drive step change value creation for our shareholders and further expedite our growth.</p><p>Executing on our three pillar strategy will encompass cost rationalization, which is already well under way. As we previously discussed, we actioned approximately $20 million in annual cash cost reductions in early 2020. During Q2, we further increased this amount by approximately $30 million in cost reductions related to COVID-19 by reducing the use of contractors, T&E expenses and other non-HR expenses for the rest of 2020.</p><p>In addition, as part of our new strategy work, we're identifying additional cash cost savings by flattening our organizational structure, eliminating duplicative costs across our new organization and reducing our global facilities footprint. A good part of the savings will be reinvested behind growth and reassure value maximization to our shareholders.</p><p>Additionally, we are reviewing our capital allocation. Our short-term priority is to continue to deleverage the business. In Q2, we paid down $40 million and our net debt ratio has declined to 3.3 times as of Q2 2020. In the medium term, we will also reallocate free cash flow to invest in our business, return capital to our shareholders through share buybacks and undertake accretive M&A.</p><p>We plan to provide an update on our progress implementing these initiatives on our Q3 earnings call. We also expect a fulsome discussion during an Investor Day we are targeting for November 2020.</p><p>I know ACI is under way and will be fully launched by January 2021. We understand there is much work to do, but I have said before, I strongly believe we have the right team to succeed. There is a sense of urgency as well as optimism throughout the management team as we execute our new strategy to reposition the business for long-term value creation.</p><p>To conclude, driving revenue growth is in my DNA and will be in the new ACI DNA too. We have a clear vision. ACI is well positioned to capitalize on the emerging trends in digital payments and specifically real-time payments. But we have plenty of room to improve in operational and go-to market discipline and execution. I have no doubt that by executing on our three 3 pillar strategy, leveraging our go-to-market experiencing and benefiting from a new cutting-edge sales process and culture, we will generate continuous profitable growth and significant value creation.</p><p>I will now hand the call to Scott to discuss the Company's Q2 results. Scott?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Thanks, Odilon, and good morning, everyone.</p><p>I first plan to go through our results for the second quarter and then provide some high-level commentary regarding our expense reduction initiatives and outlook for the rest of 2020. We'll then open the line for question.</p><p>I'll be starting my comments on slide 7 with key takeaways from the quarter. New bookings were $136 million, up 6% from Q2 last year as we continued to see strong growth in real-time payments as well as our bill pay solution. We ended the quarter with a 12-month backlog of $1.1 billion and a 60-month backlog of $5.8 billion. Q2 revenue came in at $300 million, up 2% from Q2 last year on a constant currency basis. The growth was driven primarily by having a full quarter of Speedpay revenue in 2020 versus a partial quarter in 2019. Excluding the impact of the incremental Speedpay revenue, revenue declined on a constant currency basis by roughly 10%, primarily driven by the impact of COVID-19.</p><p>Looking at our On Demand business which saw a 15% decline excluding Speedpay, the largest portion of the decline is related to the shift in tax payments from Q2 to Q3 as a result of the IRS and many of the state tax deadlines moving out 90 days this year. Aside from the government tax payments, we have seen year-over-year declines in other biller segments as a result of COVID-19, but those transaction declines have been offset by higher transactions from our secure e-commerce solution.</p><p>We saw less of an impact from COVID-19 in Q2 in our On Premise business, which declined 2% compared to Q2 last year. Declines in nonrecurring license and service revenues were partially offset by higher recurring maintenance revenue.</p><p>We saw total recurring revenue grow 4% compared to Q2 last year and now comprises 78% of total revenue versus 75% of total revenue in Q2 last year. And despite the challenges related to COVID-19, we continue to focus on maximizing profitability.</p><p>Our efforts to improve our operational discipline helped generate significant profitability growth in the quarter with adjusted EBITDA of $78 million, up 42% from Q2 last year. Consolidated net adjusted EBITDA margin expanded to 35%, up from 25% last year, which represents nearly 1,000 basis points of improvement. It's important to note that this growth is not just a result of the incremental Speedpay contribution as EBITDA also grew on an organic basis, improving 25% compared to Q2 last year. We saw profitability improvement in both our On Demand and our On Premise businesses on an organic basis.</p><p>Turning next to slide 8. Starting with debt and [Phonetic] liquidity. The solid growth in EBITDA delivered strong cash flow from operating activities of $68 million in the quarter, up more than 370% from Q2 last year. And we have significant liquidity, as we ended the quarter with $129 million of cash and $300 million available on our revolver. We also paid down $40 million of debt during the quarter. Our current debt balance is $1.3 billion, which represents a net debt leverage ratio of 3.3 times.</p><p>Turning next to our outlook for the rest of 2020. As previously announced, given the uncertainties around COVID-19, we've temporarily suspended our financial guidance for the rest of the year. So I won't give you full financial ranges, but I will say again that while revenues have been impacted by COVID-19, we are very focused on maximizing profitability and cash flow.</p><p>As Odilon mentioned, we've actioned approximately $30 million in cost reductions in response to COVID-19 by reducing the use of contractors, T&E expenses and other non-HR expenses for the rest of 2020. This is in addition to the approximately $20 million in annual and ongoing cash cost reductions that we implemented as we entered 2020 pre-COVID.</p><p>Further, as a part of our new strategy work, the team here is identifying additional cash cost savings by flattening our organizational structure, eliminating duplicative costs across our new organization and reducing our global facilities footprint. We anticipate that a good portion of the savings will be reinvested behind growth initiatives. Odilon and I and the rest of the management team are heavily engaged in this review and we plan to provide more details at our November Investor Day.</p><p>So that concludes my prepared remarks. Operator, we are ready to open the line to questions at this time.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-81362">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-81362');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] Your first question comes from the line of Peter Heckmann of Davidson.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>[Technical Issues] Just, guys, could you give just a little bit more color on the bill pay? I think I missed the commentary there. Could you actually talk about how bill pay did and give us your estimate of what type volume might have pushed into the third quarter?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Yeah. What I mentioned was that we had -- the biggest driver of ultimately the decrease in bill pay year-over-year was the shift in the tax payments. And so -- I didn't necessarily mention transaction volume, but the year-over-year Q2 decline related to government tax payments was about $16 million.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>That's helpful. And have you seen that volumes then have a commensurate uptick in July?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>A good portion of that came back in July, but not all of it. I mean, obviously, we're going to have to see how the rest of the quarter goes and all the way through the extension timing to see if we get that all back. But a good portion came back in July.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>Great, great. And then just one question on -- I know as capitalized software looks like it's up about 40% year to date, what are you thinking about that for the full year and what are some of the projects that are included in that you capitalized for the quarter?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Really, the only place we do that in is in our -- in parts of our On Demand business, so it'll be the platforms. So we're going through right now platform consolidation, we're going through, especially in the bill pay side of the business, and the front end under -- what we bought under Speedpay was the next-gen front end and we're continuing to develop that. So I wouldn't look at Q2 as a trend by quarter going forward. Obviously, there was -- there were certain work that could certainly be progressed more in the last 90 days than others because that's more internal piece of work.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>Got it. Thank you.</p><p><strong>Operator</strong></p><p>Your next question comes from the line of Mayank Tandon of Needham.</p><p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p><p>Hey, good morning, guys. This is actually Kyle Peterson on -- for Mayank. Thanks for taking our questions. I just wanted to start out on gross margins. It looks like they were definitely one of the big drivers of the profitability upside this quarter. Just wanted to see how much of that was organic improvement versus Speedpay fully lapping and then trying to get any flavor as to how much of that might be sustainable to keep expanding on the gross margin side in the back half of the year.</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Yeah. Well, if we just looked at the pure organic business, we had 25% increase in EBITDA year-over-year, and that contribution came across pretty much all of our cost lines, so would have benefited at the gross margin line. And we saw a margin improvement in both the On Premise business and the AOD business. So, again, it gets into the scale of the business and scale of the cost structure.</p><p>Really, I would say there was two -- there was two major cost reductions we did this year. If you recall, when we came into the year, we took out about $20 million annually in terms of operational efficiencies. Those are what I'd call more permanent in nature. Those are permanent parts of our cost structure. They -- so they survive this year, they'll survive COVID.</p><p>What we actioned really in late first quarter, early second quarter was an additional $30 million of cost really specifically in reaction to COVID. I would generally consider those more temporary in nature, things like travel expenses, some of our trade shows and things that didn't happen. We reduced contractors. And obviously those costs, as things normalize and things come back, obviously we'll get to traveling again, we'll get to the trade shows, and the contractor costs will come back as the growth comes back as well.</p><p>So -- but there is an element of -- again, if I look at just purely the organic business, there is an element of the improved profitability there, again 25% in the quarter, and part of that's coming from the $20 million we took out early in the year.</p><p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p><p>Okay. That's helpful. And -- and I guess just continuing on the $30 million costs -- in extra kind of COVID related cost savings, how much of that was in the run rate in the 2Q numbers and how much of that will kind of start to flow through into 3Q? Is it about 50-50 or is it mostly kind of baked in the run rate right now?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>I think Q2 is probably a pretty good indicator. Again, it has the full amount that we took out early in the year, and we auctioned the $30 million pretty quickly. And if we look at the course of the year, Q2 probably had the biggest impact because a lot of things really kind of -- I don't want to say they came to a halt, but certainly things like travel and a lot of the trade shows and things have just really gone. So the benefit of that in our P&L -- we saw a lot of that benefit in Q2. Obviously, as we, in Q3 and Q4, when we start to see travel pick up, those costs will start to come back a bit. But I think Q2 is a good indicator of the full amount of cost benefit for a -- for a 90-day period.</p><p>And the only other thing I'd go back to on -- you had mentioned you're focused more on the gross margin in your question. Remember, on the biller side of the business, there is interchange costs with that revenue. So when I said the revenue declined in Q2 on the tax side of $16 million, there is a pretty sizable interchange costs that goes with that, and so -- that's in the cost of goods sold. So we really have less of an impact on the Company at the net revenue level and the EBITDA level as a result of that tax -- those tax payments moving out.</p><p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p><p>Okay. That's helpful. And then I guess last one from me and then I'll step back from the queue -- but just wanted to get -- the services revenue came in a bit lighter than our expectation. Is there anything noisy going along there or is it just a little less demand during COVID? Just want to try to get the sense of when we might see some signs of stabilization there.</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>I wouldn't say anything in particularly noisy. I mean, we were able to continue projects during the last 90 days. If you look at our -- if you look at our new bookings, we had more new bookings in the quarter in On Demand and we actually saw the decline in On Premise. On Premise is where we see the sales related to services work. So there is obviously a drop-off in the On Premise business in terms of services sales, and that will -- that will impact Q2. It may impact us a little more in the second half, but nothing other -- nothing other than that. It's not there has been a change in terms of what we're doing in terms of our services portfolio. I would say, part of it's COVID and part of it's just the lower sales in the quarter.</p><p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p><p>All right. Thanks for the color. Nice quarter. Thanks, guys.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Your next question comes from the line of George Sutton of Craig-Hallum.</p><p><strong>George Frederick Sutton</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p><p>Good morning, Odilon and Scott. So we attended a interesting webinar you guys hosted about real-time payments, but one of the key themes really has been that real-time has been accelerated. When does this become a revenue driver in your view in the US or does it remain sort of a European-centric factor and how would you quantify the near-term addressable market?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Maybe I take that and then Odilon can add some color. Obviously, the biggest growth we've seen in real-time is outside of US but -- and that's both on new logos as well as add-ons to selling our real-time capability to our existing customer base. And we mentioned a -- an Asian customer that purchased real-time this quarter. That that was revenue in quarter, that was an On Premise sale, so that converts pretty quickly. But most of the growth we've -- has come from overseas. Obviously, our US banks are -- we're selling that in addition when we -- especially when we go on with renewals. But in terms of a real tipping point in the US, I'm not sure when that will be. But certainly a lot of our growth in the -- 20 plus percent growth that we've seen over the last few years has -- a lot of that's really come in from overseas.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Thanks. Just to complement, I think -- also we saw bookings are growing 50% plus, right, so that still is the trend. We are very much focused behind real-time payments, and that will be one of our pillars -- continue to be one of our pillars of growth. It already represents more than 10% of our revenue, so it's significant. And also, the other place that you can expect a lot of growth is emerging markets outside of US and Europe. So, I think very much real-time is around the globe and specifically emerging markets.</p><p><strong>George Frederick Sutton</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p><p>Just to clarify, did you say bookings for real-time were up 60% [Phonetic]? Or [Speech Overlap]</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Yeah, 50 [Phonetic] plus percent, yeah, in a quarter, yeah.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>60 [Phonetic].</p><p><strong>George Frederick Sutton</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p><p>And then, a quick follow-up. So you picked up on Visa, Mastercard and some others expanding click to pay to 80 new countries. Can you talk about that a bit, sort of how are you involved and could that be a meaningful volume and revenue opportunity?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Well, we wouldn't speak to anything in particular with any of our customers or any of our partners in terms of -- obviously we're heavily involved, both going direct in real-time initiatives and also working via our partnership with Mastercard already under the VocaLink partnership that we have.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah. I think you can expect a lot of activity [Indecipherable] behind real-time payments and that will encompass alliances, that will encompass us going by ourselves. But it will be a clear area of focus for us.</p><p><strong>George Frederick Sutton</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p><p>Great. Thanks, guys. Congrats on the quarter.</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Thanks.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Your next question comes from Brett Huff of Stephens, Inc.</p><p><strong>Brett Richard Huff</strong> -- <em>Stephens Inc. -- Analyst</em></p><p>Good afternoon, guys -- good morning, guys. Hope you're doing well.</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Thanks, Brett.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you, Brett.</p><p><strong>Brett Richard Huff</strong> -- <em>Stephens Inc. -- Analyst</em></p><p>Two questions from me. I'll ask them both and then I'll get off. One is, really good bookings quarter surprisingly to us just given that we had seen some banks kind of pause spending. I think you said you had a couple of merchant deals in there. But wondering if you could give us an update on what banks are looking at buying and kind of their tenure of how they're thinking about spending. And then number two, I think you highlighted a little bit some of your initiatives that you can start working on. I think sales execution and maybe sales reorganization was one of them. Can you just tell us a little bit more about that and kind of when we should maybe start seeing some of the fruits of that [Technical Issues]? Thanks.</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Maybe, Odilon, I'll take the first one.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah.</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>The new bookings growth in the quarter, up 6% year-over-year in a COVID quarter, that's probably pretty good. Q2 is not typically our strongest bookings quarter, in fairness. But like I said, we had a lot more growth -- we had a high growth in the On Demand business., w actually saw a decline in the On Premise business. But the growth we saw was actually -- most of it really wasn't from banks. Our two biggest net new logos, one was a biller customer and the other was our secure e-commerce solution, so merchant solution. And then our biggest add-on was in real-time. So a lot of the growth we saw in the quarter was from billers, merchants and then, as Odilon mentioned, the real-time up 65%. So...</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah...</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>And I'm not necessarily -- I wouldn't necessarily say that that's an indicator that banks aren't spending, but I'm just saying, for the quarter, that's where we really saw our growth.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah. I think -- I think -- but we did see, as Scott said, some impact on On Premise new bookings. So clearly there are some clients that are delaying the decision, yeah. So that's consistent to what you heard before. Just our On Demand business did wonderful and that's what offset on the total bookings part. So we -- and we would expect that that trend on the On Premise will continue. For us, it's a timing issue only because our products are, as you know, mission-critical. So it's a question of time when we're going to be able to sign those clients. But yes, there are some impacts on that. That's consistent to what you have been seeing. I think that's the first question.</p><p>The second one on the execution. Just going to give you some data that we are working with our consultants and external team to date. In sales, for example, in the sales organization, we are going to centralize the sales organization. We are hiring a Chief Revenue Officer. I think we're going to have announcement as soon as next week about the name of that Chief Revenue Officer. And by centralizing that, just to give an idea how agile we're going to be, you can expect three levels of management between the CEO and the sales rep around the globe. So that give us an idea about the kind of change that we are going to be doing and how agile we are going to be. And together with that, we are revising everything. We're revising how we build compensation, how we manage the pipeline, how we evaluate the pipeline detail by detail on that. So you can expect, again, a very nimble, agile organization with decision power really in the field and with a strong process behind it.</p><p><strong>Brett Richard Huff</strong> -- <em>Stephens Inc. -- Analyst</em></p><p>Great. Thank you.</p><p><strong>Operator</strong></p><p>Your next question is a follow-up from the line of Peter Heckmann of Davidson.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>Hi, thanks for taking the follow-up. I just wanted to see if you could provide us any insight into the ongoing process of some of the -- larger contract expansions in the pipeline and do you have any thoughts on timing there.</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Yeah. I mean, we -- I think we said earlier this year that we were -- just to be clear, we weren't expecting any of those or forecasted any of those in this year's guidance. But obviously we continue to have conversations with our customers and even net new logos on a large -- large new opportunity. So nothing that I would say we're expecting here before the end of the year.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>Okay. I guess one of my understandings was that when a customer goes through a large merger, they need to renegotiate the contract they got before they can consolidate their payment operations. Is not -- is that not the case?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Well, no -- yeah, I would say it's generally the case because the license is very specific to the contracting user and their -- it's very specific to the usage. So if they were to actually expand that use to other parts of their operation, acquired operation, then, yeah, it would have to be recontracted. I will point out that, and we mentioned this earlier in the year too, one of the large mergers, they actually executed their renewal early. If you recall, it was a renewal from next year. They actually renewed it back in the first half of this year. So they've recommitted to the next five years. Now, that is what, specifically what they're -- what they're using today. So it's not an expanded deal, but it's a recommitment to our technology for the next five years and that was [Indecipherable] to renew next year.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>Okay. All right. Thank you. And then, Odilon, just a question for you. I mean, do you see kind of the mix, the customer mix shifting at all in your outlook in terms of where you see opportunities from US banks, global banks, emerging markets increasing importance of the merchant channel? Can you talk a little bit about how you see that the -- can you maybe -- [Indecipherable] more of the sales coming from which of those -- which of those verticals over the next [Indecipherable]?</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah, no, thanks for the question. You can expect a more -- a much more focused organization going forward. So we will have some pillars [Technical Issues] accelerate significantly. One of the pillars will be real-time payments. So that will continue to be accelerated. A part of it is already at the 60% plus growth in bookings that we have referred to and we are going to be -- continue to push that big time.</p><p>I think the other area of focus definitely that we're going to be seeing is emerging markets. We are defining a concept called fighting unit which is the intersection between geography rather than segment, and you're going to have around 20 fighting units around the globe that we are going to be investing heavily behind it. If you put all of that together, I can anticipate to you that real-time payments, overall, it's going to be an area of focus and emerging market, specifically, will be also an area of focus.</p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p>Helpful. Thank you.</p><p><strong>Operator</strong></p><p>Your next question comes from the line of Joseph Vafi of Canaccord.</p><p><strong>Joseph Anthony Vafi</strong> -- <em>Canaccord Genuity Corp. -- Analyst</em></p><p>Hey guys, good morning. Just a follow-up on the real-time deals in the quarter, the Indonesian bank and Rabo, just to get a feel for how competitive are these -- are these types of situations for I guess the new customers, I guess, especially on the real-time front. And then secondly, do you think we see M&A for -- during -- or, I guess, I know you're going through some organizational changes. Does M&A come after the organizational changes are done or could we see M&A while things are still being optimized here? Thanks a lot.</p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p>I will start. Yeah. I will start with the last one and I will give the first one to Scott. I think we are always looking at the M&A, right. We always like -- I have deals on my table that comes all the time and we are always looking into that. My very -- my focus now is really organic growth. I think we need to start and show this organic growth. And M&A could happen while we are doing this if we got like a spectacular accretive option. But at this point, my focus and the organizational focus is to assure that we position the Company for continuous profitable growth. Scott?</p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p>Yeah, I think when it comes to the real-time, we have the relationships with the largest banks in the world and have for a long time with our -- with our retail payments engine. So in a lot of cases, we're a -- we're a natural to provide the real-time capability. So a lot of our success is coming from just selling into that existing base, whether it's a new application or expanding on some of the -- some of the real-time capabilities that they already have.</p><p>So on the net new logo, that's probably going to be more in what I'd call more in the central infrastructure where we -- they can either procure it as a licensed software, which is really our model, or if they want somebody to operate it, that's typically going to be provided by somebody else. And so, I would say probably more competitive in the central infrastructures but in terms of the connectivity to those central infrastructures, we're just a natural fit with our existing large bank customer base throughout the world.</p><p><strong>Joseph Anthony Vafi</strong> -- <em>Canaccord Genuity Corp. -- Analyst</em></p><p>Great. Thanks. Very helpful.</p><p><strong>Operator</strong></p><p>And there are no further questions at this time. I will now turn the floor back over to John for any closing or additional comments.</p><p><strong>John Kraft</strong> -- <em>Vice President, Investor Relations & Strategic Analysis</em></p><p>Well, thanks, everybody, for dialing in and your interest. We look forward to catching up in the following weeks. Have a good day.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 37 minutes</strong></p><h2>Call participants:</h2><p><strong>John Kraft</strong> -- <em>Vice President, Investor Relations & Strategic Analysis</em></p><p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p><p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p><p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p><p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p><p><strong>George Frederick Sutton</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p><p><strong>Brett Richard Huff</strong> -- <em>Stephens Inc. -- Analyst</em></p><p><strong>Joseph Anthony Vafi</strong> -- <em>Canaccord Genuity Corp. -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/aciw">More ACIW analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than ACI Worldwide, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DACI%2520Worldwide%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=5efbfcbf-a172-4fef-bcdd-8ebc7c9882e6">ten best stocks</a></strong> for investors to buy right now… and ACI Worldwide, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DACI%2520Worldwide%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=5efbfcbf-a172-4fef-bcdd-8ebc7c9882e6" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-44665", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ACIW"], "primary_tickers_companies": ["ACI Worldwide, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ACI Worldwide Inc (ACIW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 13, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-44665"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-44665", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ACIW"], "primary_tickers_companies": ["ACI Worldwide, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ACI Worldwide Inc (ACIW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 13, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ACIW earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>ACI Worldwide Inc</strong> <span class="ticker" data-id="205809">(<a href="https://www.fool.com/quote/nasdaq/aci-worldwide-inc/aciw/">NASDAQ:ACIW</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:30 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by and welcome to the ACI Second Quarter Earnings Conference Call. [Operator Instructions]</p>, <p>I would now like to turn the conference over to your speaker, Mr. John Kraft, Vice President of Investor Relations and Strategy. Thank you. Please go ahead, sir.</p>, <p><strong>John Kraft</strong> -- <em>Vice President, Investor Relations & Strategic Analysis</em></p>, <p>[Technical Issues] deck today, a copy of which is available on our website as well as with the SEC.</p>, <p>On this morning's call is Odilon Almeida, our CEO, and Scott Behrens, our CFO.</p>, <p>Before I turn it over, I'd like to share the Company management will be attending the Wells Fargo Virtual 5th Annual Technology Services Forum on August 11; the Canaccord 40th Annual Growth Conference, August 12; and the Second Annual Needham Virtual FinTech & Digital Transformation 1X1 Conference on August 19.</p>, <p>With that, I'd like to turn the call over to Odilon.</p>, <p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Thank you, John, and good morning, everyone.</p>, <p>Thank you for joining us for our second quarter 2020 earnings conference call. On our last earnings call in May, COVID-19 and unprecedented global impact on people and economies was top of mind and the central focus of our discussion. Now in August, we find ourselves in slightly different circumstances but with many of the same challenges. I hope you and your families are staying safe and well and we at ACI remain committed to doing everything we can to ensure the health, safety and well-being of our employees as we seamlessly support our customers.</p>, <p>On today's call, I will begin with our second quarter financial results. Importantly, I'd also like to share in more detail my vision for profitable revenue growth and long-term value creation.</p>, <p>We are living in a different world compared to even three or four months ago. While different parts of the globe are experiencing different stages and levels of severity of the pandemic, undoubtedly there are ways in which our world has changed from [Technical Issues]. As it relates to ACI, the pandemic has heightened awareness and accelerated widespread acceptance of the essential role digital payment systems play in our modern economy.</p>, <p>Starting with the second quarter, new sales bookings were $136 million, up 6% from Q2 last year. We saw particular strength in our merchant business, signing two larger PSP contracts, RS2 in Europe and Hyperpay in Middle East, that will allow these partners to offer merchant acquiring and e-commerce services to their customers in new geographies. Another area of continued strength in the quarter was real-time. We signed a long-term support agreement with our customer, Rabobank, who was looking to expand its existing real-time payment offering by supporting batch payments. Another existing customer, one of the largest interbank switches in Indonesia, has selected ACI to orchestrate all their alternative payments, including QR, early pay and other real-time offerings. Despite our revenues being impacted by COVID-19, our EBITDA increased by 42% compared to Q2 of 2019 with margin expansion increasing to 35%, up from 25% last year.</p>, <p>Our efforts to improve operational discipline are working, and we continue to focus on maximizing profitability while advancing our pipeline of deals to position ACI for future continuous, profitable growth.</p>, <p>As I mentioned last quarter, we are fortunate to have a resilient business model with significant recurring revenue, reliable cash flows and high customer retention, all of which are helping us weather the COVID-19 related uncertainty. On our first quarter call, I shared with you my background and experience in realigning operations toward revenue growth, margin expansion and value creation. I also spoke about time I devoted to speaking with ACI's customers, employees and leaders. Since that time, I have also been getting feedback from our investors. These conversations have made clear to me that ACI has a strong portfolio of customers in software-led payment solutions, and importantly the human capital and talent to succeed.</p>, <p>On the last earnings call, I have also communicated my initial and high-level perspectives on ACI's growth potential and the three pillars of our strategy which will position the Company for continuous profitable growth. Today, I'm pleased to share additional details on our progress. Over the last few months, we have engaged our best internal experts and industry-leading consultants to help us review our business and intensify opportunities for efficiency gains and growth optimization. These small consultant teams have worked with me on several similar efforts over many years. We have a playbook with a proven track record. Although our work is not complete, we have identified key initiatives to support the three pillars of our strategy that will drive value creation opportunities for ACI.</p>, <p>Our first pillar, Fit for Growth, is the refining and realignment of our organizational structure and operating model to better position the Company for organic growth. This involves reviewing the organization model and geographic footprint and designing an agile and nimble organization that is better at creating and sustaining continuous profitable organic growth. We are also designing a best-in-class global sales organization and culture. This initiative focuses on execution, and we will strengthen accountability, enhanced transparency and reduced duplicative costs throughout the Company. We are very close to hiring a Chief Revenue Officer and a Chief Human Resources Officer to complete the leadership team.</p>, <p>Our second pillar is called Focus on Growth. We'll design an organic growth strategy that puts a disciplined focus on areas where we can optimize growth. We are reviewing our current solutions to identify the best opportunities to invest our operating and capital expenditures going forward. We will focus on a smaller set of growth-rich software-led solutions supported by differentiated innovation in specific geographies and market segments. We will ensure all of our priority solutions are cloud-first in terms of architecture, deployment and operations. We will prioritize investments that have the best market opportunities to generate the highest revenue growth and cash flows and would earn the highest ROI. This will become a core discipline here at ACI. Importantly, this investment will come from cost discipline and reallocation, not incremental spend.</p>, <p>Our third pillar is Step Change Value Creation through M&A. We've also continued to pursue accretive M&A to drive step change value creation for our shareholders and further expedite our growth.</p>, <p>Executing on our three pillar strategy will encompass cost rationalization, which is already well under way. As we previously discussed, we actioned approximately $20 million in annual cash cost reductions in early 2020. During Q2, we further increased this amount by approximately $30 million in cost reductions related to COVID-19 by reducing the use of contractors, T&E expenses and other non-HR expenses for the rest of 2020.</p>, <p>In addition, as part of our new strategy work, we're identifying additional cash cost savings by flattening our organizational structure, eliminating duplicative costs across our new organization and reducing our global facilities footprint. A good part of the savings will be reinvested behind growth and reassure value maximization to our shareholders.</p>, <p>Additionally, we are reviewing our capital allocation. Our short-term priority is to continue to deleverage the business. In Q2, we paid down $40 million and our net debt ratio has declined to 3.3 times as of Q2 2020. In the medium term, we will also reallocate free cash flow to invest in our business, return capital to our shareholders through share buybacks and undertake accretive M&A.</p>, <p>We plan to provide an update on our progress implementing these initiatives on our Q3 earnings call. We also expect a fulsome discussion during an Investor Day we are targeting for November 2020.</p>, <p>I know ACI is under way and will be fully launched by January 2021. We understand there is much work to do, but I have said before, I strongly believe we have the right team to succeed. There is a sense of urgency as well as optimism throughout the management team as we execute our new strategy to reposition the business for long-term value creation.</p>, <p>To conclude, driving revenue growth is in my DNA and will be in the new ACI DNA too. We have a clear vision. ACI is well positioned to capitalize on the emerging trends in digital payments and specifically real-time payments. But we have plenty of room to improve in operational and go-to market discipline and execution. I have no doubt that by executing on our three 3 pillar strategy, leveraging our go-to-market experiencing and benefiting from a new cutting-edge sales process and culture, we will generate continuous profitable growth and significant value creation.</p>, <p>I will now hand the call to Scott to discuss the Company's Q2 results. Scott?</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>Thanks, Odilon, and good morning, everyone.</p>, <p>I first plan to go through our results for the second quarter and then provide some high-level commentary regarding our expense reduction initiatives and outlook for the rest of 2020. We'll then open the line for question.</p>, <p>I'll be starting my comments on slide 7 with key takeaways from the quarter. New bookings were $136 million, up 6% from Q2 last year as we continued to see strong growth in real-time payments as well as our bill pay solution. We ended the quarter with a 12-month backlog of $1.1 billion and a 60-month backlog of $5.8 billion. Q2 revenue came in at $300 million, up 2% from Q2 last year on a constant currency basis. The growth was driven primarily by having a full quarter of Speedpay revenue in 2020 versus a partial quarter in 2019. Excluding the impact of the incremental Speedpay revenue, revenue declined on a constant currency basis by roughly 10%, primarily driven by the impact of COVID-19.</p>, <p>Looking at our On Demand business which saw a 15% decline excluding Speedpay, the largest portion of the decline is related to the shift in tax payments from Q2 to Q3 as a result of the IRS and many of the state tax deadlines moving out 90 days this year. Aside from the government tax payments, we have seen year-over-year declines in other biller segments as a result of COVID-19, but those transaction declines have been offset by higher transactions from our secure e-commerce solution.</p>, <p>We saw less of an impact from COVID-19 in Q2 in our On Premise business, which declined 2% compared to Q2 last year. Declines in nonrecurring license and service revenues were partially offset by higher recurring maintenance revenue.</p>, <p>We saw total recurring revenue grow 4% compared to Q2 last year and now comprises 78% of total revenue versus 75% of total revenue in Q2 last year. And despite the challenges related to COVID-19, we continue to focus on maximizing profitability.</p>, <p>Our efforts to improve our operational discipline helped generate significant profitability growth in the quarter with adjusted EBITDA of $78 million, up 42% from Q2 last year. Consolidated net adjusted EBITDA margin expanded to 35%, up from 25% last year, which represents nearly 1,000 basis points of improvement. It's important to note that this growth is not just a result of the incremental Speedpay contribution as EBITDA also grew on an organic basis, improving 25% compared to Q2 last year. We saw profitability improvement in both our On Demand and our On Premise businesses on an organic basis.</p>, <p>Turning next to slide 8. Starting with debt and [Phonetic] liquidity. The solid growth in EBITDA delivered strong cash flow from operating activities of $68 million in the quarter, up more than 370% from Q2 last year. And we have significant liquidity, as we ended the quarter with $129 million of cash and $300 million available on our revolver. We also paid down $40 million of debt during the quarter. Our current debt balance is $1.3 billion, which represents a net debt leverage ratio of 3.3 times.</p>, <p>Turning next to our outlook for the rest of 2020. As previously announced, given the uncertainties around COVID-19, we've temporarily suspended our financial guidance for the rest of the year. So I won't give you full financial ranges, but I will say again that while revenues have been impacted by COVID-19, we are very focused on maximizing profitability and cash flow.</p>, <p>As Odilon mentioned, we've actioned approximately $30 million in cost reductions in response to COVID-19 by reducing the use of contractors, T&E expenses and other non-HR expenses for the rest of 2020. This is in addition to the approximately $20 million in annual and ongoing cash cost reductions that we implemented as we entered 2020 pre-COVID.</p>, <p>Further, as a part of our new strategy work, the team here is identifying additional cash cost savings by flattening our organizational structure, eliminating duplicative costs across our new organization and reducing our global facilities footprint. We anticipate that a good portion of the savings will be reinvested behind growth initiatives. Odilon and I and the rest of the management team are heavily engaged in this review and we plan to provide more details at our November Investor Day.</p>, <p>So that concludes my prepared remarks. Operator, we are ready to open the line to questions at this time.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-81362">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-81362');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Your first question comes from the line of Peter Heckmann of Davidson.</p>, <p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p>, <p>[Technical Issues] Just, guys, could you give just a little bit more color on the bill pay? I think I missed the commentary there. Could you actually talk about how bill pay did and give us your estimate of what type volume might have pushed into the third quarter?</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>Yeah. What I mentioned was that we had -- the biggest driver of ultimately the decrease in bill pay year-over-year was the shift in the tax payments. And so -- I didn't necessarily mention transaction volume, but the year-over-year Q2 decline related to government tax payments was about $16 million.</p>, <p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p>, <p>That's helpful. And have you seen that volumes then have a commensurate uptick in July?</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>A good portion of that came back in July, but not all of it. I mean, obviously, we're going to have to see how the rest of the quarter goes and all the way through the extension timing to see if we get that all back. But a good portion came back in July.</p>, <p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p>, <p>Great, great. And then just one question on -- I know as capitalized software looks like it's up about 40% year to date, what are you thinking about that for the full year and what are some of the projects that are included in that you capitalized for the quarter?</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>Really, the only place we do that in is in our -- in parts of our On Demand business, so it'll be the platforms. So we're going through right now platform consolidation, we're going through, especially in the bill pay side of the business, and the front end under -- what we bought under Speedpay was the next-gen front end and we're continuing to develop that. So I wouldn't look at Q2 as a trend by quarter going forward. Obviously, there was -- there were certain work that could certainly be progressed more in the last 90 days than others because that's more internal piece of work.</p>, <p><strong>Peter James Heckmann</strong> -- <em>D.A. Davidson & Co. -- Analyst</em></p>, <p>Got it. Thank you.</p>, <p><strong>Operator</strong></p>, <p>Your next question comes from the line of Mayank Tandon of Needham.</p>, <p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>Hey, good morning, guys. This is actually Kyle Peterson on -- for Mayank. Thanks for taking our questions. I just wanted to start out on gross margins. It looks like they were definitely one of the big drivers of the profitability upside this quarter. Just wanted to see how much of that was organic improvement versus Speedpay fully lapping and then trying to get any flavor as to how much of that might be sustainable to keep expanding on the gross margin side in the back half of the year.</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>Yeah. Well, if we just looked at the pure organic business, we had 25% increase in EBITDA year-over-year, and that contribution came across pretty much all of our cost lines, so would have benefited at the gross margin line. And we saw a margin improvement in both the On Premise business and the AOD business. So, again, it gets into the scale of the business and scale of the cost structure.</p>, <p>Really, I would say there was two -- there was two major cost reductions we did this year. If you recall, when we came into the year, we took out about $20 million annually in terms of operational efficiencies. Those are what I'd call more permanent in nature. Those are permanent parts of our cost structure. They -- so they survive this year, they'll survive COVID.</p>, <p>What we actioned really in late first quarter, early second quarter was an additional $30 million of cost really specifically in reaction to COVID. I would generally consider those more temporary in nature, things like travel expenses, some of our trade shows and things that didn't happen. We reduced contractors. And obviously those costs, as things normalize and things come back, obviously we'll get to traveling again, we'll get to the trade shows, and the contractor costs will come back as the growth comes back as well.</p>, <p>So -- but there is an element of -- again, if I look at just purely the organic business, there is an element of the improved profitability there, again 25% in the quarter, and part of that's coming from the $20 million we took out early in the year.</p>, <p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>Okay. That's helpful. And -- and I guess just continuing on the $30 million costs -- in extra kind of COVID related cost savings, how much of that was in the run rate in the 2Q numbers and how much of that will kind of start to flow through into 3Q? Is it about 50-50 or is it mostly kind of baked in the run rate right now?</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>I think Q2 is probably a pretty good indicator. Again, it has the full amount that we took out early in the year, and we auctioned the $30 million pretty quickly. And if we look at the course of the year, Q2 probably had the biggest impact because a lot of things really kind of -- I don't want to say they came to a halt, but certainly things like travel and a lot of the trade shows and things have just really gone. So the benefit of that in our P&L -- we saw a lot of that benefit in Q2. Obviously, as we, in Q3 and Q4, when we start to see travel pick up, those costs will start to come back a bit. But I think Q2 is a good indicator of the full amount of cost benefit for a -- for a 90-day period.</p>, <p>And the only other thing I'd go back to on -- you had mentioned you're focused more on the gross margin in your question. Remember, on the biller side of the business, there is interchange costs with that revenue. So when I said the revenue declined in Q2 on the tax side of $16 million, there is a pretty sizable interchange costs that goes with that, and so -- that's in the cost of goods sold. So we really have less of an impact on the Company at the net revenue level and the EBITDA level as a result of that tax -- those tax payments moving out.</p>, <p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>Okay. That's helpful. And then I guess last one from me and then I'll step back from the queue -- but just wanted to get -- the services revenue came in a bit lighter than our expectation. Is there anything noisy going along there or is it just a little less demand during COVID? Just want to try to get the sense of when we might see some signs of stabilization there.</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>I wouldn't say anything in particularly noisy. I mean, we were able to continue projects during the last 90 days. If you look at our -- if you look at our new bookings, we had more new bookings in the quarter in On Demand and we actually saw the decline in On Premise. On Premise is where we see the sales related to services work. So there is obviously a drop-off in the On Premise business in terms of services sales, and that will -- that will impact Q2. It may impact us a little more in the second half, but nothing other -- nothing other than that. It's not there has been a change in terms of what we're doing in terms of our services portfolio. I would say, part of it's COVID and part of it's just the lower sales in the quarter.</p>, <p><strong>Kyle Peterson</strong> -- <em>Needham & Company -- Analyst</em></p>, <p>All right. Thanks for the color. Nice quarter. Thanks, guys.</p>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Your next question comes from the line of George Sutton of Craig-Hallum.</p>, <p><strong>George Frederick Sutton</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p>, <p>Good morning, Odilon and Scott. So we attended a interesting webinar you guys hosted about real-time payments, but one of the key themes really has been that real-time has been accelerated. When does this become a revenue driver in your view in the US or does it remain sort of a European-centric factor and how would you quantify the near-term addressable market?</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>Maybe I take that and then Odilon can add some color. Obviously, the biggest growth we've seen in real-time is outside of US but -- and that's both on new logos as well as add-ons to selling our real-time capability to our existing customer base. And we mentioned a -- an Asian customer that purchased real-time this quarter. That that was revenue in quarter, that was an On Premise sale, so that converts pretty quickly. But most of the growth we've -- has come from overseas. Obviously, our US banks are -- we're selling that in addition when we -- especially when we go on with renewals. But in terms of a real tipping point in the US, I'm not sure when that will be. But certainly a lot of our growth in the -- 20 plus percent growth that we've seen over the last few years has -- a lot of that's really come in from overseas.</p>, <p><strong>Odilon Almeida</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Thanks. Just to complement, I think -- also we saw bookings are growing 50% plus, right, so that still is the trend. We are very much focused behind real-time payments, and that will be one of our pillars -- continue to be one of our pillars of growth. It already represents more than 10% of our revenue, so it's significant. And also, the other place that you can expect a lot of growth is emerging markets outside of US and Europe. So, I think very much real-time is around the globe and specifically emerging markets.</p>, <p><strong>George Frederick Sutton</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p>, <p>Just to clarify, did you say bookings for real-time were up 60% [Phonetic]? Or [Speech Overlap]</p>, <p><strong>Scott Behrens</strong> -- <em>Senior Executive Vice President, Chief Financial Officer</em></p>, <p>Yeah, 50 [Phonetic] plus percent, yeah, in a quarter, yeah.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-44665", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ACIW"], "primary_tickers_companies": ["ACI Worldwide, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ACI Worldwide Inc (ACIW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 13, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-44665"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-44665", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ACIW"], "primary_tickers_companies": ["ACI Worldwide, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ACI Worldwide Inc (ACIW) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 13, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ACIW earnings call for the period ending June 30, 2020. | I would now like to turn the conference over to your speaker, Mr. John Kraft, Vice President of Investor Relations and Strategy. Thank you. Please go ahead, sir.\n [Technical Issues] deck today, a copy of which is available on our website as well as with the SEC.\n On this morning's call is Odilon Almeida, our CEO, and Scott Behrens, our CFO.\n Before I turn it over, I'd like to share the Company management will be attending the Wells Fargo Virtual 5th Annual Technology Services Forum on August 11; the Canaccord 40th Annual Growth Conference, August 12; and the Second Annual Needham Virtual FinTech & Digital Transformation 1X1 Conference on August 19.\n With that, I'd like to turn the call over to Odilon.\n Thank you, John, and good morning, everyone.\n Thank you for joining us for our second quarter 2020 earnings conference call. On our last earnings call in May, COVID-19 and unprecedented global impact on people and economies was top of mind and the central focus of our discussion. Now in August, we find ourselves in slightly different circumstances but with many of the same challenges. I hope you and your families are staying safe and well and we at ACI remain committed to doing everything we can to ensure the health, safety and well-being of our employees as we seamlessly support our customers.\n On today's call, I will begin with our second quarter financial results. Importantly, I'd also like to share in more detail my vision for profitable revenue growth and long-term value creation.\n We are living in a different world compared to even three or four months ago. While different parts of the globe are experiencing different stages and levels of severity of the pandemic, undoubtedly there are ways in which our world has changed from [Technical Issues]. As it relates to ACI, the pandemic has heightened awareness and accelerated widespread acceptance of the essential role digital payment systems play in our modern economy.\n Starting with the second quarter, new sales bookings were $136 million, up 6% from Q2 last year. We saw particular strength in our merchant business, signing two larger PSP contracts, RS2 in Europe and Hyperpay in Middle East, that will allow these partners to offer merchant acquiring and e-commerce services to their customers in new geographies. Another area of continued strength in the quarter was real-time. We signed a long-term support agreement with our customer, Rabobank, who was looking to expand its existing real-time payment offering by supporting batch payments. Another existing customer, one of the largest interbank switches in Indonesia, has selected ACI to orchestrate all their alternative payments, including QR, early pay and other real-time offerings. Despite our revenues being impacted by COVID-19, our EBITDA increased by 42% compared to Q2 of 2019 with margin expansion increasing to 35%, up from 25% last year.\n Our efforts to improve operational discipline are working, and we continue to focus on maximizing profitability while advancing our pipeline of deals to position ACI for future continuous, profitable growth.\n As I mentioned last quarter, we are fortunate to have a resilient business model with significant recurring revenue, reliable cash flows and high customer retention, all of which are helping us weather the COVID-19 related uncertainty. On our first quarter call, I shared with you my background and experience in realigning operations toward revenue growth, margin expansion and value creation. I also spoke about time I devoted to speaking with ACI's customers, employees and leaders. Since that time, I have also been getting feedback from our investors. These conversations have made clear to me that ACI has a strong portfolio of customers in software-led payment solutions, and importantly the human capital and talent to succeed.\n On the last earnings call, I have also communicated my initial and high-level perspectives on ACI's growth potential and the three pillars of our strategy which will position the Company for continuous profitable growth. Today, I'm pleased to share additional details on our progress. Over the last few months, we have engaged our best internal experts and industry-leading consultants to help us review our business and intensify opportunities for efficiency gains and growth optimization. These small consultant teams have worked with me on several similar efforts over many years. We have a playbook with a proven track record. Although our work is not complete, we have identified key initiatives to support the three pillars of our strategy that will drive value creation opportunities for ACI.\n Our first pillar, Fit for Growth, is the refining and realignment of our organizational structure and operating model to better position the Company for organic growth. This involves reviewing the organization model and geographic footprint and designing an agile and nimble organization that is better at creating and sustaining continuous profitable organic growth. We are also designing a best-in-class global sales organization and culture. This initiative focuses on execution, and we will strengthen accountability, enhanced transparency and reduced duplicative costs throughout the Company. We are very close to hiring a Chief Revenue Officer and a Chief Human Resources Officer to complete the leadership team.\n Our second pillar is called Focus on Growth. We'll design an organic growth strategy that puts a disciplined focus on areas where we can optimize growth. We are reviewing our current solutions to identify the best opportunities to invest our operating and capital expenditures going forward. We will focus on a smaller set of growth-rich software-led solutions supported by differentiated innovation in specific geographies and market segments. We will ensure all of our priority solutions are cloud-first in terms of architecture, deployment and operations. We will prioritize investments that have the best market opportunities to generate the highest revenue growth and cash flows and would earn the highest ROI. This will become a core discipline here at ACI. Importantly, this investment will come from cost discipline and reallocation, not incremental spend.\n Our third pillar is Step Change Value Creation through M&A. We've also continued to pursue accretive M&A to drive step change value creation for our shareholders and further expedite our growth.\n Executing on our three pillar strategy will encompass cost rationalization, which is already well under way. As we previously discussed, we actioned approximately $20 million in annual cash cost reductions in early 2020. During Q2, we further increased this amount by approximately $30 million in cost reductions related to COVID-19 by reducing the use of contractors, T&E expenses and other non-HR expenses for the rest of 2020.\n In addition, as part of our new strategy work, we're identifying additional cash cost savings by flattening our organizational structure, eliminating duplicative costs across our new organization and reducing our global facilities footprint. A good part of the savings will be reinvested behind growth and reassure value maximization to our shareholders.\n Additionally, we are reviewing our capital allocation. Our short-term priority is to continue to deleverage the business. In Q2, we paid down $40 million and our net debt ratio has declined to 3.3 times as of Q2 2020. In the medium term, we will also reallocate free cash flow to invest in our business, return capital to our shareholders through share buybacks and undertake accretive M&A.\n We plan to provide an update on our progress implementing these initiatives on our Q3 earnings call. We also expect a fulsome discussion during an Investor Day we are targeting for November 2020.\n I know ACI is under way and will be fully launched by January 2021. We understand there is much work to do, but I have said before, I strongly believe we have the right team to succeed. There is a sense of urgency as well as optimism throughout the management team as we execute our new strategy to reposition the business for long-term value creation.\n To conclude, driving revenue growth is in my DNA and will be in the new ACI DNA too. We have a clear vision. ACI is well positioned to capitalize on the emerging trends in digital payments and specifically real-time payments. But we have plenty of room to improve in operational and go-to market discipline and execution. I have no doubt that by executing on our three 3 pillar strategy, leveraging our go-to-market experiencing and benefiting from a new cutting-edge sales process and culture, we will generate continuous profitable growth and significant value creation.\n I will now hand the call to Scott to discuss the Company's Q2 results. Scott?\n Thanks, Odilon, and good morning, everyone.\n I first plan to go through our results for the second quarter and then provide some high-level commentary regarding our expense reduction initiatives and outlook for the rest of 2020. We'll then open the line for question.\n I'll be starting my comments on slide 7 with key takeaways from the quarter. New bookings were $136 million, up 6% from Q2 last year as we continued to see strong growth in real-time payments as well as our bill pay solution. We ended the quarter with a 12-month backlog of $1.1 billion and a 60-month backlog of $5.8 billion. Q2 revenue came in at $300 million, up 2% from Q2 last year on a constant currency basis. The growth was driven primarily by having a full quarter of Speedpay revenue in 2020 versus a partial quarter in 2019. Excluding the impact of the incremental Speedpay revenue, revenue declined on a constant currency basis by roughly 10%, primarily driven by the impact of COVID-19.\n Looking at our On Demand business which saw a 15% decline excluding Speedpay, the largest portion of the decline is related to the shift in tax payments from Q2 to Q3 as a result of the IRS and many of the state tax deadlines moving out 90 days this year. Aside from the government tax payments, we have seen year-over-year declines in other biller segments as a result of COVID-19, but those transaction declines have been offset by higher transactions from our secure e-commerce solution.\n We saw less of an impact from COVID-19 in Q2 in our On Premise business, which declined 2% compared to Q2 last year. Declines in nonrecurring license and service revenues were partially offset by higher recurring maintenance revenue.\n We saw total recurring revenue grow 4% compared to Q2 last year and now comprises 78% of total revenue versus 75% of total revenue in Q2 last year. And despite the challenges related to COVID-19, we continue to focus on maximizing profitability.\n Our efforts to improve our operational discipline helped generate significant profitability growth in the quarter with adjusted EBITDA of $78 million, up 42% from Q2 last year. Consolidated net adjusted EBITDA margin expanded to 35%, up from 25% last year, which represents nearly 1,000 basis points of improvement. It's important to note that this growth is not just a result of the incremental Speedpay contribution as EBITDA also grew on an organic basis, improving 25% compared to Q2 last year. We saw profitability improvement in both our On Demand and our On Premise businesses on an organic basis.\n Turning next to slide 8. Starting with debt and [Phonetic] liquidity. The solid growth in EBITDA delivered strong cash flow from operating activities of $68 million in the quarter, up more than 370% from Q2 last year. And we have significant liquidity, as we ended the quarter with $129 million of cash and $300 million available on our revolver. We also paid down $40 million of debt during the quarter. Our current debt balance is $1.3 billion, which represents a net debt leverage ratio of 3.3 times.\n Turning next to our outlook for the rest of 2020. As previously announced, given the uncertainties around COVID-19, we've temporarily suspended our financial guidance for the rest of the year. So I won't give you full financial ranges, but I will say again that while revenues have been impacted by COVID-19, we are very focused on maximizing profitability and cash flow.\n As Odilon mentioned, we've actioned approximately $30 million in cost reductions in response to COVID-19 by reducing the use of contractors, T&E expenses and other non-HR expenses for the rest of 2020. This is in addition to the approximately $20 million in annual and ongoing cash cost reductions that we implemented as we entered 2020 pre-COVID.\n Further, as a part of our new strategy work, the team here is identifying additional cash cost savings by flattening our organizational structure, eliminating duplicative costs across our new organization and reducing our global facilities footprint. We anticipate that a good portion of the savings will be reinvested behind growth initiatives. Odilon and I and the rest of the management team are heavily engaged in this review and we plan to provide more details at our November Investor Day.\n So that concludes my prepared remarks. Operator, we are ready to open the line to questions at this time.\n | ACI Worldwide Inc | (NASDAQ:ACIW) | Aug 6, 2020 | 8:30 a.m. ET | 8 | am | 2020-08-06 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | I hope you and your families are staying safe and well and we at ACI remain committed to doing everything we can to ensure the health, safety and well-being of our employees as we seamlessly support our customers. | I hope you and your families are staying safe and well and we at ACI remain committed to doing everything we can to ensure the health, safety and well-being of our employees as we seamlessly support our customers. | [0.6498686 0.01032718 0.33980417] | positive | 0.639541 | 2020-08-07 | 29.000000 | 31.139999 | 27.670000 | 30.940001 | 1444767.0 | 31.270000 | 31.969999 | 30.000000 | 30.500000 | 1107699.0 | Technology | 2020-06-30 | 2020-06-30 | 0.12 | -0.051000 | 2020-06-30 | ACIW | 0.171000 | beat | 1.500000 | increase | 0 | positive |
| 7 | ACRE | /earnings/call-transcripts/2020/08/07/ares-commercial-real-estate-corp-acre-q2-2020-earn.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Ares Commercial Real Estate Corp</strong> <span class="ticker" data-id="273369">(<a href="https://www.fool.com/quote/nyse/ares-commercial-real-estate-corporation/acre/">NYSE:ACRE</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">12:00 p.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Good afternoon, and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Second Quarter 2020 Financial Results. As a reminder, this conference is being recorded on August 6, 2020.</p><p>I will now turn the call over to Veronica Mayer from Investor Relations. Please go ahead.</p><p><strong>Veronica Mendiola Mayer</strong> -- <em>Principal, Public Investor Relations and Communications</em></p><p>Good afternoon, and thank you for joining us on today's conference call. I am joined today by our CEO, Bryan Donohoe; David Roth, our President; Tae-Sik Yoon, our CFO; and Carl Drake, our Head of Public Company Investor Relations.</p><p>In addition to our press release and the 10-Q that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.</p><p>Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The Company's actual results could differ materially from those expressed in these forward-looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements.</p><p>During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, and these measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures used by other companies.</p><p>With that, I will now turn the call over to Bryan Donohoe.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Veronica, and good afternoon, everyone. At the onset of the COVID-19 pandemic and its disruptions to the real estate markets, we immediately set several goals and objectives. We aim to maintain stable earnings and use our asset management capabilities to preserve our strong credit quality. We also sought out opportunities to selectively divest certain assets to enhance our liquidity and manage risk exposure.</p><p>With respect to the balance sheet, we focused on managing our lender relationships and reducing overall leverage. Our overarching goal was to execute on these objectives and protect shareholder value, and I'm pleased to say that we have made progress in all of these areas during the second quarter and into this current quarter.</p><p>The work that we completed leading into 2020 has given us a very strong foundation to weather significant economic headwinds. For example, over the last few years we strategically positioned our portfolio to be conservative and well-diversified. The portfolio was comprised of 95% senior loans across 50 investments in 17 different markets with limited exposure to gateway cities. We focused our originations primarily on multifamily, office and industrial properties with limited exposure to hotels and retail. We also built in LIBOR floors to protect our earnings in low interest rate environments.</p><p>Furthermore, we maintained diversified sources of funding, particularly with respect to hotel loans and we refused to finance our loans with spread-based mark-to-market facilities. As a result, we are proud that our portfolio has performed well, and that our balance sheet remains sound. We have not made any fundamental changes to our business, but rather we have focused on opportunities to enhance our position, and we're excited about the outlook for our Company.</p><p>Let me now walk through our financial results at a high-level, and some of the specific progress we made. This morning, we reported consistent core EPS of $0.32 per share, and GAAP EPS of $0.29 as our earnings continue to benefit from our diversified portfolio and the LIBOR floor protection on nearly all of our loans. During the second quarter, our portfolio quality improved as the number of loans on non-accrual status declined and our overall internal credit risk ratings improved. 100% of our loans held for investment made their contractual debt service payments through July, including the three loans that remain on non-accrual status. Two loans representing 2% of our loans held for investment, as measured by outstanding principal balance, are under short-term contractual forbearance agreements.</p><p>Our internal risk ratings also improved. On a 1 to 5 rating scale, with 1 being the lowest and 5 being the highest, 91% of our loans rated a 3 or better versus 84% last quarter. Our non-accruing loans declined from 6% of unpaid principal balance to 4%, including the removal of one hotel loan where we extended the upcoming maturity of the loan in exchange for a partial debt pay down and the funding of substantial interest in operating reserves from the sponsor.</p><p>During the second quarter and subsequent to quarter end, we also took steps to increase our liquidity and manage our risk by prudently divesting selected assets through five transactions. First, we refinanced two loans secured by multifamily properties in Florida, totaling $138 million. Post closing, we transferred the subordinate interest in the two loans to a third-party and subsequently financed our senior position through our securitization. On a net basis, this transaction resulted in $35 million in cash, while at the same time, derisking our position. We enhanced our liquidity, while creating attractive interest earning loans backed by multifamily properties.</p><p>Subsequent to quarter end, we sold three loans, two secured by multifamily properties and one by a hotel property. These five transactions totaled $238 million in unpaid principal balance and generated $60 million of net cash. The average price for the five loans was 97% of par value, which included three loans at par, one at 95% of par, and one non-performing hotel loan at 92.5% of par.</p><p>Following the sale of the hotel loan, our overall hotel loan exposure decreased by $31 million to $237 million in outstanding principal balance across five loans. In total, the five loan transactions helped improve our cash position to $80 million as of August 5, 2020, net of paying our second quarter cash dividend of $0.33 per share on July 15. We also reduced our overall balance sheet leverage, as Tae-Sik will discuss.</p><p>Our dedicated asset management team has worked diligently over the last few months and this can be seen by the credit improvement in our portfolio and our enhanced liquidity. We continue to have constructive dialogue with each of our borrowers, allowing us to navigate uncertainties in the market and to seek to address the issues proactively that occur -- that could occur in the portfolio.</p><p>Going forward, while we continue to actively manage our existing portfolio and our balance sheet liquidity, we believe we have the financial flexibility to go on offense and take advantage of attractive financing opportunities. We are using our extensive relationships and leveraging the power of the Ares platform to see off-market, higher spread, attractive investment opportunities, albeit with less senior leverage available. We are primarily focusing on multifamily properties, industrial properties, offices with long-term leases, as well as self-storage assets, which have historically had less volatility and are more consistently financeable. Our goal is to rigorously preserve our strong credit quality, and thus, every investment is being highly scrutinized for safety and attractive yields.</p><p>With that, I will turn the call over to Tae-Sik.</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Great. Thank you, Bryan, and good afternoon, everyone. Earlier today, we reported consistent core earnings of $10.7 million, or $0.32 per common share, in part as 94% of our loans have LIBOR floors at a weighted average rate of 1.77%, an additional 2% of our loans are fixed rate.</p><p>Our GAAP net income was $9.8 million, or $0.29 per common share. Our GAAP earnings were impacted in the second quarter, primarily due to an unrealized loss of $4 million, or approximately $0.12 per common share in connection with marking to market three loans held for sale that were subsequently sold in the third quarter.</p><p>In addition, our REO property, Westchester Marriott, had a loss of approximately $2.2 million, or $0.06 in the second quarter. While the West -- while the Marriott Westchester had been adversely impacted by the pandemic, like most service hotels focus on business travelers, we have taken numerous initiatives to limit expenses and start to rebuild its revenue base. In essence, we have effectively converted the hotel to a limited service model and we have focused our sales and marketing team to solicit government and other essential workers. We're also benefiting from a significant reduction in competition as a few neighboring hotels are closed or closing, some of which we understand maybe permanent. Our progress is expected to be seen in the third quarter with expected losses to be materially curtailed.</p><p>Turning now to our liquidity, as of yesterday's close, we had approximately $80 million in unrestricted cash. In addition, we believe that we have available to us further sources of liquidity should the need arise. For example, we have remaining unfunded capacity under our FL3 Securitization, and we believe that we could monetize additional loans, particularly those backed by multifamily properties at par or close to par.</p><p>Now, let me discuss our liabilities and debt facilities. As we have said in the past, we have very purposely pursued a strategy of diversifying sources of financing and match funding assets and liabilities. And in the past few months, we have begun to reduce our overall leverage ratios and the share of our liabilities subject to credit-based margin calls. First, following the sale or other monetization of the five loans that Bryan previously discussed, including those that closed after the second quarter, we reduced our debt-to-equity ratio from 3.2 times as of March 31, 2020 to 2.9 times currently, both measured excluding our CECL reserves. On a recourse basis, our debt-to-equity leverage has been reduced to less than 1.9 times. We will continue to pursue opportunities to reduce our leverage further.</p><p>And second, with respect to reducing our liability, subject to credit-based margin calls, we have looked to further term out our financing and have also employed senior subordinate loan structures. For example, for the two multifamily loans totaling $138 million in outstanding principal that we refinanced, shortly after closing, we transferred $38 million of subordinate participations to a third-party while retaining the $100 million interest. You will note in our financials that although the $38 million subordinate participations are junior to our senior positions and not indebtedness to us, the transaction did not qualify as syndications, so that the entire $138 million loan remains consolidated as an asset on our balance sheet with a $38 million subordinate interest presented as a liability on our balance sheet. Again, we bear no obligation to repay the $38 million in junior participations, and such interests are subordinate to our $100 million in senior participations.</p><p>Also, as a reminder, none of our warehouse financing facility contain mark-to-market remargining provisions that are based on changes in market borrowing spreads. Instead, our warehouse lines have remargining provisions based on the credit performance of our loans.</p><p>Finally, our CECL reserve was at $28 million for the quarter ended June 30, down approximately $4 million from the previous quarter. This reduction in the provision was primarily attributable to the three loans that were transferred to loans held for sale, which reduced our CECL reserves by approximately $1.2 million. One additional loan that was repaid that further reduced our CECL reserves by $0.5 million and reduction in the average remaining term for the overall loan portfolio.</p><p>And with that, I will now turn the call back over to Bryan for some closing remarks.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Tae-Sik. To sum it up, we are really proud of the significant progress we have made with respect to our objectives of enhancing liquidity, maintaining strong profitability, and improving credit quality, while protecting shareholder value. We are pleased with the performance of our portfolio and the hard work and dedication of our entire team. We are all stronger for persisting through the last five months together, which makes us better positioned to navigate the road ahead and to take advantage of the opportunities we believe we will find in the market going forward.</p><p>With that, I'd like to ask the operator to open the line for questions.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-37418">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-37418');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] And our first question comes from Stephen Laws of Raymond James. Please proceed.</p><p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p><p>Hi, good morning. I guess to start, Tae-Sik, you talked a little bit about leverage in your prepared remarks and that it will -- you -- the Company was going to continue to look for ways to reduce it from here. Is there a target you have in mind? Or what do you think about is the right leverage level to operate the business going forward? And how does that maybe target move around based on the mix of mark-to-market versus non-mark-to-market financing facilities that you have?</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Sure. Good afternoon, Stephen. Thanks so much for your question. No. It's a -- that's a great question. While we don't have, I would say, a target per se, in the past, we had sort of mentioned 3.0 debt-to-equity as sort of the right balance between leverage and earnings. And I think we have been successful in staying within plus or minus that 3.0 debt-to-equity ratio. I would say right now, we're underneath that 3.0, if you want to call it, approximately 2.5 to 2.75 is sort of the target range overall.</p><p>But having said that, I think it's important to point out that, again, it will depend on the multitude of factors, I think you suggested one of them, which is really important, which is our recourse leverage those that are subject to potential margin calls, even if they are simply credit-based and not spread-based, what is termed out? What is less termed out? What is the rate of that financing? What is the maturity of that financing? So there is a multitude of factors that we're taking to account. But I would say generically, just given current market conditions, we would like to seek to reduce our leverage further from that 2.9 total leverage ratio that we have today, the 1.9 recourse leverage ratio today, tweak it down a little further, but again, it will be an evolving situation based upon the totality of what our liabilities and, of course, asset performance looks like.</p><p>And, of course, it's a fact that we are 95% senior that I think when you compare our leverage ratio to maybe some of our peers who may not be as focused on senior. And that leverage ratio really needs to take into account some maybe the off-balance sheet leverage that others may have on their loans. So, again, I just want to emphasize that. We are 95% senior and therefore, the leverage ratio should really be taking into consideration with that into account.</p><p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p><p>Great. And then unfunded commitments, I think I saw the total in the funded, it's about $250 million I think. Please correct me if that's not right. But can you talk a little bit, of the $250 million, how much of that is available to be drawn down now? How much has milestones or completions attached to it? Or for leasing up assets? Can you talk about how you expect that $250 million to be funded over time?</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Sure. As you know, the type of loans that we have historically made are transitional loans, where we fund the majority of the commitment upfront. So we certainly have in most of our loans, a component of the commitment that we believe will be funded over time. The primary use of that funding over time, the unfunded commitments, is really what we call good news money, right. Good news money associated with leasing of assets, so that for the dollars are necessary for tenant improvements, for leasing commissions, capital expenditures that may be necessary or part of that. And so, when we put money out, for the most part, we think that's a very positive -- that means that there has been very positive progress in the business plans of the underlying properties themselves.</p><p>So you're right, we do have approximately $250 million outstanding. I think they can't just simply draw the money, like these are not unfettered credit lines where a borrower can just simply do a drawdown notice and ask for that $250 million. They have to meet milestones. They have to hit the good news that we've talked about. It has to be in accordance with the business plan. So there are [Technical Issues] loan-by-loan, different milestones that are necessary to be met in order for those dollars to be drawn down.</p><p>But I would say, for the most part, again, the majority of that $250 million is for positive events that have happened in the underlying property. And obviously, we're prepared to fund those dollars, because we believe it enhances the underlying collateral values of the properties themselves due to increases in the cash flow.</p><p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p><p>Great. Last question from me, I think I ask every quarter, but the Ares facility, I know it's been a pre-funding facility, but not really doing the new originations now to pre-fund the portfolio, I don't think. Has there been any development with that facility? Is there any optionality to it that you could use that financing for something else? Or how do you think about that facility as far as being there if you do a new rate origination, are you looking for stuff that you may like to put on that? Kind of any update around the Ares facility?</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>No, absolutely. The Ares facility has been a tremendous benefit to ACRE pre-pandemic and during the pandemic. So, one of the potential uses is, given the liquidity of ACRE, given the balance sheet of ACRE, if we found a very attractive investment that we -- at this moment, don't want to take on to ACRE's balance sheet but do wanted as future inventory, it is certainly something we can do using that Ares warehouse.</p><p>The other potential use of the Ares warehouse in this current market environment is that, and I think we had mentioned this a little bit in our first quarter earnings call as well, is that, we can use it sort of in the reverse direction that maybe the primary purpose. In other words, we can take a loan that is already on ACRE's balance sheet, sell it to the Ares warehouse to free up capital on ACRE's balance sheet with the potential and with the option to buyback in the future. I would say, all of that would be done at fair market values. But again, it does provide an additional source of potential liquidity for ACRE, if and as needed.</p><p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p><p>That's great. Appreciate the color on that. Thank you for taking my questions this morning.</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Absolutely, Stephen. Thanks so much.</p><p><strong>Operator</strong></p><p>Our next question comes from Doug Harter of Credit Suisse. Doug, please proceed.</p><p><strong>Joshua Bolton</strong> -- <em>Credit Suisse -- Analyst</em></p><p>Hey, guys. This is actually Josh Bolton on for Doug. You talked about in your prepared remarks talking about going on offense or the ability to start going on offense. I'm wondering if you can talk a little bit about the pipeline that you're seeing or the opportunities you're seeing currently. And how spreads available today compared to what you were seeing pre-COVID? Thanks.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Yeah, absolutely. I think what we've seen over the last 45 to 60 days as a pretty significant expansion in the pipeline of opportunities, I'd still say that's coming off of a relatively low bar during the more acute portion of the COVID crisis, but we've been very pleased with what we're starting to see. Still, I'd say, a small percentage of those would fall in the actionable category. But we would expect that during the tail end of the third and into the fourth quarter, we'll be fine. And just following the trend lines over the last 60 days, as I said, I think we'll try to -- we'll be successful in churning up some opportunities that are actionable.</p><p>With respect to your latter question regarding spreads, what we've seen is, significant movement beyond the decline in LIBOR. So, obviously, over the last 18 months, we've seen a decline in LIBOR in the neighborhood of 150 basis points. I would say, that spreads are now wider by a greater margin than that. So think about an average loan, just if I'm thinking apples-to-apples in at LIBOR plus 3.50% to 3.75% of six, eight months ago, that same loan today is probably 4.75% to 5.00% over. So still an attractive all-in coupon for a borrower, which I think is an important part to make sure we end up with willing buyers and sellers at the transaction table. But what it allows for us is to have the underlying asset. The loan itself will provide a much greater proportion of all-in yield relative to some of the financial engineering and levered returns that we've seen in the marketplace over the past 18 months. So, all in all, we feel the expansion in the pipeline has been significant and we're pretty bullish on what the fourth quarter and first quarter of next year look like.</p><p><strong>Joshua Bolton</strong> -- <em>Credit Suisse -- Analyst</em></p><p>Great. Appreciate the comments. Thank you.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Our next question comes from Jade Rahmani of KBW. Jade, please proceed.</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Thank you very much. Can you say -- can you give some indication as to whether you expect the current level of earnings to be maintained? You mentioned a few positives that could bolster earnings, including LIBOR floors, as well as some recent improvement in credit and expense curtailment on the Westchester Hotel property. On the other hand, the portfolio is a little bit smaller post some of the actions you've taken. So, just wondering directionally what you're thinking.</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Sure. Jade. This is a Tae-Sik. I can start with that question. So, I think the asset transactions that we've talked about, the five that we talked about, while that will have some impact on earnings going forward, we do think it will be mitigated by some of the other aspects that we've talked about, right? So, we do think that the loss on Westchester Marriott heading into the third quarter looks like it's going to be materially mitigated versus even second quarter. We do think that's a full impact of LIBOR floors will continue to be felt in the third quarter. Second quarter, we certainly had a very material impact as LIBOR continue to fall. In the second quarter, it wasn't, what I would call a full quarter's impact of where LIBOR ended up as of June 30. But so far into the third quarter, we've benefited from a much fuller impact for the LIBOR floors.</p><p>Third, as you said, we are doing what we can to minimize G&A expenses overall. And so, I'll say this sort of without some extraordinary or somewhat one-time events, we do think operating earnings will remain very consistent for ACRE heading into the third quarter and not materially impacted due to the five loan transactions that we spoke about.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Yeah. And the one thing I'd add...</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Oh, go ahead.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Just a quick add on, I think. If you think about a normal capital markets environment, wherein LIBOR floor is at the weighted average of 1.7 or thereabouts, that we have relative to underlying LIBOR at -- in the low-double digits. Normally that would be an inducement for accelerated repayments. And as the -- while some of the capital markets have returned to normalcy, there is still a disruption such that that inducement, while people would love to lower their borrowing costs, we're not seeing that accelerated repayment. So, I think we have some stickier loans there, where we will continue to benefit from those LIBOR floors, while being able to continue to stabilize the Marriott Westchester, as well as pursue some one-off idiosyncratic risk situations that will provide higher yield. So, we're pretty happy with the portfolio and what it's been generating and what we expect it to continue to generate.</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>The one-off idiosyncratic [Speech Overlap]. Go ahead. Sorry about that.</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Yeah, Jade. Yeah, I'm sorry. One other thing I just want to add to your question is, in terms of core earnings for the third quarter, I think this should be apparent. But just to make sure that the $4 million mark-to-market loss that we took in the second quarter that impacted GAAP earnings did not impact core earnings since the definition core earnings would add back unrealized gains and losses. Third quarter, as we mentioned, those transaction did close. And so, the impact of that $4 million will go through core earnings in the third quarter. So, I think you're probably already aware of all that, but I just wanted to point that out.</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Right. And would there be somewhat of an offset in the reserve based on that?</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>You mean CECL reserves?</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Yeah. The -- I mean, provision for loan losses inclusive of CECL.</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>For the third quarter, obviously, it's a little too early to tell. But as we mentioned in our Q and prepared remarks that of the CECL reserve that change that we had in the second quarter, about $1.2 million of that was due to the transactions that resulted in the sales in the third quarter. So, that's already, in essence, been taken into account in the CECL reserve because when you transfer a loan from held for investment to available for sale, you then are marking that mark-to-market, and so you're taking off the previously held CECL reserve against it. So, there may be additional movements in the third quarter, but in connection with the actual transactions themselves, those have already been accounted for in the second quarter.</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Okay. Got it. So, the core earnings -- operating earnings could be consistent, but there is the realization of that loss that would run through core earnings in the third quarter.</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Correct.</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Okay. In terms of the second quarter, away from loan sale activity, did you -- what was the magnitude of loan repayments, ordinary course loan repayments?</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>So for second quarter, we really did not have material loan repayments. We obviously didn't [Phonetic] refinance the $138 million now loan that that Bryan referred to. So that technically is a repayment and a new origination, but obviously it was really a refinancing of our own loan. Subsequent to second quarter in early July, we did have a repayment of approximately $50 million, and this was an ordinary loan repayment, actually happened earlier than the stated maturity. And so, we did have that loan repayment but that happened early third quarter, not second quarter.</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Got it. Are you [Technical Issues] to paying any additional repayments in the third quarter? And should we expect the fundings of previous commitments to be similar to what took place in the second quarter?</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Sure. I think we're obviously closely monitoring business line progress and availability of capital that would permit refinancings or payoffs of our loans. And right now, I think we don't expect there to be material amounts. But there could be some level of repayment in the third quarter. It certainly would not be commensurate with pre-pandemic levels. But there could be some repayments in the third quarter.</p><p>And then as far as future funding is concerned, I think as we mentioned, we have about $250 million of unfunded commitments that is over the remaining expected life of all 50 loans held for investment. So it's spread out across quite a few investments. It is very bespoke loan-by-loan, situation-by-situation, transaction-by-transaction of when those money get drawn. I would say, we have historically had, call it, plus or minus $25 million per quarter. Again, that is a very, very general number, so I wouldn't count on that being the number for any specific quarter but that's kind of been what we've seen in the past.</p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p>Thank you very much for taking the questions.</p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p>Great. Thank you, Jade.</p><p><strong>Operator</strong></p><p>And our final question comes from Chris Muller of JMP Securities. Chris, please proceed.</p><p><strong>Ronald Josey</strong> -- <em>JMP Securities LLC -- Analyst</em></p><p>Hey, guys. Ron for Steve today. Thanks for taking the question. I want to see if you could just give some general commentary about the student housing in the portfolio. We've heard some positive trends from some other people in the space. So just want to see what you guys had to say about it.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Yeah. We would probably echo that, I think it's been a very positive last 90 days in this space, owing a little bit to less folks being housed on-campus and pushing some demand off-campus. But universally, we've seen occupancy and rate outpace 12 months ago. And importantly, to add on there, early in the COVID crisis, what you saw with the leasing at these properties was that they effectively had an out clause if schools didn't open or if COVID caused some resurgence there. And almost universally, we've seen that clause and the leases go away, so that they are binding and they're maintaining the same amount or a similar amount, I should say, of parental guarantees on those leases. So, in some, we think the loans -- the lease structures are positive. And again, far outpacing last year's pace of leasing and rate.</p><p><strong>Ronald Josey</strong> -- <em>JMP Securities LLC -- Analyst</em></p><p>Great. Super helpful. And thanks for taking my question.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>This concludes our question-and-answer session. I would now like to turn the conference back over to Bryan Donohoe for any closing remarks.</p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p>Yeah. Thanks everyone for joining today and spending time with us. We really appreciate your continued support of ACRE, and we look forward to speaking to you again on the next earning call. Be well and thank you.</p><p><strong>Operator</strong></p><p>Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour after the end of this call through August 20, 2020, to domestic callers by dialing 1-888-344-7529, and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10146422. An archived replay will also be available on a webcast link located on the homepage of the Investor Relations -- Resources section of our website. Thank you very much.</p><p><strong>Duration: 36 minutes</strong></p><h2>Call participants:</h2><p><strong>Veronica Mendiola Mayer</strong> -- <em>Principal, Public Investor Relations and Communications</em></p><p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p><p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p><p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p><p><strong>Joshua Bolton</strong> -- <em>Credit Suisse -- Analyst</em></p><p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p><p><strong>Ronald Josey</strong> -- <em>JMP Securities LLC -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/acre">More ACRE analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Ares Commercial Real Estate Corporation</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAres%2520Commercial%2520Real%2520Estate%2520Corporation%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=d9950d16-0f19-47ce-8371-09c905a95460">ten best stocks</a></strong> for investors to buy right now… and Ares Commercial Real Estate Corporation wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAres%2520Commercial%2520Real%2520Estate%2520Corporation%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=d9950d16-0f19-47ce-8371-09c905a95460" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-3570", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-financials", "tickers": "[\"\"]", "primary_tickers": ["ACRE"], "primary_tickers_companies": ["Ares Commercial Real Estate Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Ares Commercial Real Estate Corp (ACRE) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 4, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-3570"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-3570", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-financials", "tickers": "[\"\"]", "primary_tickers": ["ACRE"], "primary_tickers_companies": ["Ares Commercial Real Estate Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Ares Commercial Real Estate Corp (ACRE) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 4, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ACRE earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Ares Commercial Real Estate Corp</strong> <span class="ticker" data-id="273369">(<a href="https://www.fool.com/quote/nyse/ares-commercial-real-estate-corporation/acre/">NYSE:ACRE</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">12:00 p.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Good afternoon, and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Second Quarter 2020 Financial Results. As a reminder, this conference is being recorded on August 6, 2020.</p>, <p>I will now turn the call over to Veronica Mayer from Investor Relations. Please go ahead.</p>, <p><strong>Veronica Mendiola Mayer</strong> -- <em>Principal, Public Investor Relations and Communications</em></p>, <p>Good afternoon, and thank you for joining us on today's conference call. I am joined today by our CEO, Bryan Donohoe; David Roth, our President; Tae-Sik Yoon, our CFO; and Carl Drake, our Head of Public Company Investor Relations.</p>, <p>In addition to our press release and the 10-Q that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.</p>, <p>Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The Company's actual results could differ materially from those expressed in these forward-looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements.</p>, <p>During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, and these measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures used by other companies.</p>, <p>With that, I will now turn the call over to Bryan Donohoe.</p>, <p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p>, <p>Thanks, Veronica, and good afternoon, everyone. At the onset of the COVID-19 pandemic and its disruptions to the real estate markets, we immediately set several goals and objectives. We aim to maintain stable earnings and use our asset management capabilities to preserve our strong credit quality. We also sought out opportunities to selectively divest certain assets to enhance our liquidity and manage risk exposure.</p>, <p>With respect to the balance sheet, we focused on managing our lender relationships and reducing overall leverage. Our overarching goal was to execute on these objectives and protect shareholder value, and I'm pleased to say that we have made progress in all of these areas during the second quarter and into this current quarter.</p>, <p>The work that we completed leading into 2020 has given us a very strong foundation to weather significant economic headwinds. For example, over the last few years we strategically positioned our portfolio to be conservative and well-diversified. The portfolio was comprised of 95% senior loans across 50 investments in 17 different markets with limited exposure to gateway cities. We focused our originations primarily on multifamily, office and industrial properties with limited exposure to hotels and retail. We also built in LIBOR floors to protect our earnings in low interest rate environments.</p>, <p>Furthermore, we maintained diversified sources of funding, particularly with respect to hotel loans and we refused to finance our loans with spread-based mark-to-market facilities. As a result, we are proud that our portfolio has performed well, and that our balance sheet remains sound. We have not made any fundamental changes to our business, but rather we have focused on opportunities to enhance our position, and we're excited about the outlook for our Company.</p>, <p>Let me now walk through our financial results at a high-level, and some of the specific progress we made. This morning, we reported consistent core EPS of $0.32 per share, and GAAP EPS of $0.29 as our earnings continue to benefit from our diversified portfolio and the LIBOR floor protection on nearly all of our loans. During the second quarter, our portfolio quality improved as the number of loans on non-accrual status declined and our overall internal credit risk ratings improved. 100% of our loans held for investment made their contractual debt service payments through July, including the three loans that remain on non-accrual status. Two loans representing 2% of our loans held for investment, as measured by outstanding principal balance, are under short-term contractual forbearance agreements.</p>, <p>Our internal risk ratings also improved. On a 1 to 5 rating scale, with 1 being the lowest and 5 being the highest, 91% of our loans rated a 3 or better versus 84% last quarter. Our non-accruing loans declined from 6% of unpaid principal balance to 4%, including the removal of one hotel loan where we extended the upcoming maturity of the loan in exchange for a partial debt pay down and the funding of substantial interest in operating reserves from the sponsor.</p>, <p>During the second quarter and subsequent to quarter end, we also took steps to increase our liquidity and manage our risk by prudently divesting selected assets through five transactions. First, we refinanced two loans secured by multifamily properties in Florida, totaling $138 million. Post closing, we transferred the subordinate interest in the two loans to a third-party and subsequently financed our senior position through our securitization. On a net basis, this transaction resulted in $35 million in cash, while at the same time, derisking our position. We enhanced our liquidity, while creating attractive interest earning loans backed by multifamily properties.</p>, <p>Subsequent to quarter end, we sold three loans, two secured by multifamily properties and one by a hotel property. These five transactions totaled $238 million in unpaid principal balance and generated $60 million of net cash. The average price for the five loans was 97% of par value, which included three loans at par, one at 95% of par, and one non-performing hotel loan at 92.5% of par.</p>, <p>Following the sale of the hotel loan, our overall hotel loan exposure decreased by $31 million to $237 million in outstanding principal balance across five loans. In total, the five loan transactions helped improve our cash position to $80 million as of August 5, 2020, net of paying our second quarter cash dividend of $0.33 per share on July 15. We also reduced our overall balance sheet leverage, as Tae-Sik will discuss.</p>, <p>Our dedicated asset management team has worked diligently over the last few months and this can be seen by the credit improvement in our portfolio and our enhanced liquidity. We continue to have constructive dialogue with each of our borrowers, allowing us to navigate uncertainties in the market and to seek to address the issues proactively that occur -- that could occur in the portfolio.</p>, <p>Going forward, while we continue to actively manage our existing portfolio and our balance sheet liquidity, we believe we have the financial flexibility to go on offense and take advantage of attractive financing opportunities. We are using our extensive relationships and leveraging the power of the Ares platform to see off-market, higher spread, attractive investment opportunities, albeit with less senior leverage available. We are primarily focusing on multifamily properties, industrial properties, offices with long-term leases, as well as self-storage assets, which have historically had less volatility and are more consistently financeable. Our goal is to rigorously preserve our strong credit quality, and thus, every investment is being highly scrutinized for safety and attractive yields.</p>, <p>With that, I will turn the call over to Tae-Sik.</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>Great. Thank you, Bryan, and good afternoon, everyone. Earlier today, we reported consistent core earnings of $10.7 million, or $0.32 per common share, in part as 94% of our loans have LIBOR floors at a weighted average rate of 1.77%, an additional 2% of our loans are fixed rate.</p>, <p>Our GAAP net income was $9.8 million, or $0.29 per common share. Our GAAP earnings were impacted in the second quarter, primarily due to an unrealized loss of $4 million, or approximately $0.12 per common share in connection with marking to market three loans held for sale that were subsequently sold in the third quarter.</p>, <p>In addition, our REO property, Westchester Marriott, had a loss of approximately $2.2 million, or $0.06 in the second quarter. While the West -- while the Marriott Westchester had been adversely impacted by the pandemic, like most service hotels focus on business travelers, we have taken numerous initiatives to limit expenses and start to rebuild its revenue base. In essence, we have effectively converted the hotel to a limited service model and we have focused our sales and marketing team to solicit government and other essential workers. We're also benefiting from a significant reduction in competition as a few neighboring hotels are closed or closing, some of which we understand maybe permanent. Our progress is expected to be seen in the third quarter with expected losses to be materially curtailed.</p>, <p>Turning now to our liquidity, as of yesterday's close, we had approximately $80 million in unrestricted cash. In addition, we believe that we have available to us further sources of liquidity should the need arise. For example, we have remaining unfunded capacity under our FL3 Securitization, and we believe that we could monetize additional loans, particularly those backed by multifamily properties at par or close to par.</p>, <p>Now, let me discuss our liabilities and debt facilities. As we have said in the past, we have very purposely pursued a strategy of diversifying sources of financing and match funding assets and liabilities. And in the past few months, we have begun to reduce our overall leverage ratios and the share of our liabilities subject to credit-based margin calls. First, following the sale or other monetization of the five loans that Bryan previously discussed, including those that closed after the second quarter, we reduced our debt-to-equity ratio from 3.2 times as of March 31, 2020 to 2.9 times currently, both measured excluding our CECL reserves. On a recourse basis, our debt-to-equity leverage has been reduced to less than 1.9 times. We will continue to pursue opportunities to reduce our leverage further.</p>, <p>And second, with respect to reducing our liability, subject to credit-based margin calls, we have looked to further term out our financing and have also employed senior subordinate loan structures. For example, for the two multifamily loans totaling $138 million in outstanding principal that we refinanced, shortly after closing, we transferred $38 million of subordinate participations to a third-party while retaining the $100 million interest. You will note in our financials that although the $38 million subordinate participations are junior to our senior positions and not indebtedness to us, the transaction did not qualify as syndications, so that the entire $138 million loan remains consolidated as an asset on our balance sheet with a $38 million subordinate interest presented as a liability on our balance sheet. Again, we bear no obligation to repay the $38 million in junior participations, and such interests are subordinate to our $100 million in senior participations.</p>, <p>Also, as a reminder, none of our warehouse financing facility contain mark-to-market remargining provisions that are based on changes in market borrowing spreads. Instead, our warehouse lines have remargining provisions based on the credit performance of our loans.</p>, <p>Finally, our CECL reserve was at $28 million for the quarter ended June 30, down approximately $4 million from the previous quarter. This reduction in the provision was primarily attributable to the three loans that were transferred to loans held for sale, which reduced our CECL reserves by approximately $1.2 million. One additional loan that was repaid that further reduced our CECL reserves by $0.5 million and reduction in the average remaining term for the overall loan portfolio.</p>, <p>And with that, I will now turn the call back over to Bryan for some closing remarks.</p>, <p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p>, <p>Thanks, Tae-Sik. To sum it up, we are really proud of the significant progress we have made with respect to our objectives of enhancing liquidity, maintaining strong profitability, and improving credit quality, while protecting shareholder value. We are pleased with the performance of our portfolio and the hard work and dedication of our entire team. We are all stronger for persisting through the last five months together, which makes us better positioned to navigate the road ahead and to take advantage of the opportunities we believe we will find in the market going forward.</p>, <p>With that, I'd like to ask the operator to open the line for questions.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-37418">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-37418');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] And our first question comes from Stephen Laws of Raymond James. Please proceed.</p>, <p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p>, <p>Hi, good morning. I guess to start, Tae-Sik, you talked a little bit about leverage in your prepared remarks and that it will -- you -- the Company was going to continue to look for ways to reduce it from here. Is there a target you have in mind? Or what do you think about is the right leverage level to operate the business going forward? And how does that maybe target move around based on the mix of mark-to-market versus non-mark-to-market financing facilities that you have?</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>Sure. Good afternoon, Stephen. Thanks so much for your question. No. It's a -- that's a great question. While we don't have, I would say, a target per se, in the past, we had sort of mentioned 3.0 debt-to-equity as sort of the right balance between leverage and earnings. And I think we have been successful in staying within plus or minus that 3.0 debt-to-equity ratio. I would say right now, we're underneath that 3.0, if you want to call it, approximately 2.5 to 2.75 is sort of the target range overall.</p>, <p>But having said that, I think it's important to point out that, again, it will depend on the multitude of factors, I think you suggested one of them, which is really important, which is our recourse leverage those that are subject to potential margin calls, even if they are simply credit-based and not spread-based, what is termed out? What is less termed out? What is the rate of that financing? What is the maturity of that financing? So there is a multitude of factors that we're taking to account. But I would say generically, just given current market conditions, we would like to seek to reduce our leverage further from that 2.9 total leverage ratio that we have today, the 1.9 recourse leverage ratio today, tweak it down a little further, but again, it will be an evolving situation based upon the totality of what our liabilities and, of course, asset performance looks like.</p>, <p>And, of course, it's a fact that we are 95% senior that I think when you compare our leverage ratio to maybe some of our peers who may not be as focused on senior. And that leverage ratio really needs to take into account some maybe the off-balance sheet leverage that others may have on their loans. So, again, I just want to emphasize that. We are 95% senior and therefore, the leverage ratio should really be taking into consideration with that into account.</p>, <p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p>, <p>Great. And then unfunded commitments, I think I saw the total in the funded, it's about $250 million I think. Please correct me if that's not right. But can you talk a little bit, of the $250 million, how much of that is available to be drawn down now? How much has milestones or completions attached to it? Or for leasing up assets? Can you talk about how you expect that $250 million to be funded over time?</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>Sure. As you know, the type of loans that we have historically made are transitional loans, where we fund the majority of the commitment upfront. So we certainly have in most of our loans, a component of the commitment that we believe will be funded over time. The primary use of that funding over time, the unfunded commitments, is really what we call good news money, right. Good news money associated with leasing of assets, so that for the dollars are necessary for tenant improvements, for leasing commissions, capital expenditures that may be necessary or part of that. And so, when we put money out, for the most part, we think that's a very positive -- that means that there has been very positive progress in the business plans of the underlying properties themselves.</p>, <p>So you're right, we do have approximately $250 million outstanding. I think they can't just simply draw the money, like these are not unfettered credit lines where a borrower can just simply do a drawdown notice and ask for that $250 million. They have to meet milestones. They have to hit the good news that we've talked about. It has to be in accordance with the business plan. So there are [Technical Issues] loan-by-loan, different milestones that are necessary to be met in order for those dollars to be drawn down.</p>, <p>But I would say, for the most part, again, the majority of that $250 million is for positive events that have happened in the underlying property. And obviously, we're prepared to fund those dollars, because we believe it enhances the underlying collateral values of the properties themselves due to increases in the cash flow.</p>, <p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p>, <p>Great. Last question from me, I think I ask every quarter, but the Ares facility, I know it's been a pre-funding facility, but not really doing the new originations now to pre-fund the portfolio, I don't think. Has there been any development with that facility? Is there any optionality to it that you could use that financing for something else? Or how do you think about that facility as far as being there if you do a new rate origination, are you looking for stuff that you may like to put on that? Kind of any update around the Ares facility?</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>No, absolutely. The Ares facility has been a tremendous benefit to ACRE pre-pandemic and during the pandemic. So, one of the potential uses is, given the liquidity of ACRE, given the balance sheet of ACRE, if we found a very attractive investment that we -- at this moment, don't want to take on to ACRE's balance sheet but do wanted as future inventory, it is certainly something we can do using that Ares warehouse.</p>, <p>The other potential use of the Ares warehouse in this current market environment is that, and I think we had mentioned this a little bit in our first quarter earnings call as well, is that, we can use it sort of in the reverse direction that maybe the primary purpose. In other words, we can take a loan that is already on ACRE's balance sheet, sell it to the Ares warehouse to free up capital on ACRE's balance sheet with the potential and with the option to buyback in the future. I would say, all of that would be done at fair market values. But again, it does provide an additional source of potential liquidity for ACRE, if and as needed.</p>, <p><strong>Stephen Laws</strong> -- <em>Raymond James -- Analyst</em></p>, <p>That's great. Appreciate the color on that. Thank you for taking my questions this morning.</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>Absolutely, Stephen. Thanks so much.</p>, <p><strong>Operator</strong></p>, <p>Our next question comes from Doug Harter of Credit Suisse. Doug, please proceed.</p>, <p><strong>Joshua Bolton</strong> -- <em>Credit Suisse -- Analyst</em></p>, <p>Hey, guys. This is actually Josh Bolton on for Doug. You talked about in your prepared remarks talking about going on offense or the ability to start going on offense. I'm wondering if you can talk a little bit about the pipeline that you're seeing or the opportunities you're seeing currently. And how spreads available today compared to what you were seeing pre-COVID? Thanks.</p>, <p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p>, <p>Yeah, absolutely. I think what we've seen over the last 45 to 60 days as a pretty significant expansion in the pipeline of opportunities, I'd still say that's coming off of a relatively low bar during the more acute portion of the COVID crisis, but we've been very pleased with what we're starting to see. Still, I'd say, a small percentage of those would fall in the actionable category. But we would expect that during the tail end of the third and into the fourth quarter, we'll be fine. And just following the trend lines over the last 60 days, as I said, I think we'll try to -- we'll be successful in churning up some opportunities that are actionable.</p>, <p>With respect to your latter question regarding spreads, what we've seen is, significant movement beyond the decline in LIBOR. So, obviously, over the last 18 months, we've seen a decline in LIBOR in the neighborhood of 150 basis points. I would say, that spreads are now wider by a greater margin than that. So think about an average loan, just if I'm thinking apples-to-apples in at LIBOR plus 3.50% to 3.75% of six, eight months ago, that same loan today is probably 4.75% to 5.00% over. So still an attractive all-in coupon for a borrower, which I think is an important part to make sure we end up with willing buyers and sellers at the transaction table. But what it allows for us is to have the underlying asset. The loan itself will provide a much greater proportion of all-in yield relative to some of the financial engineering and levered returns that we've seen in the marketplace over the past 18 months. So, all in all, we feel the expansion in the pipeline has been significant and we're pretty bullish on what the fourth quarter and first quarter of next year look like.</p>, <p><strong>Joshua Bolton</strong> -- <em>Credit Suisse -- Analyst</em></p>, <p>Great. Appreciate the comments. Thank you.</p>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Our next question comes from Jade Rahmani of KBW. Jade, please proceed.</p>, <p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p>, <p>Thank you very much. Can you say -- can you give some indication as to whether you expect the current level of earnings to be maintained? You mentioned a few positives that could bolster earnings, including LIBOR floors, as well as some recent improvement in credit and expense curtailment on the Westchester Hotel property. On the other hand, the portfolio is a little bit smaller post some of the actions you've taken. So, just wondering directionally what you're thinking.</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>Sure. Jade. This is a Tae-Sik. I can start with that question. So, I think the asset transactions that we've talked about, the five that we talked about, while that will have some impact on earnings going forward, we do think it will be mitigated by some of the other aspects that we've talked about, right? So, we do think that the loss on Westchester Marriott heading into the third quarter looks like it's going to be materially mitigated versus even second quarter. We do think that's a full impact of LIBOR floors will continue to be felt in the third quarter. Second quarter, we certainly had a very material impact as LIBOR continue to fall. In the second quarter, it wasn't, what I would call a full quarter's impact of where LIBOR ended up as of June 30. But so far into the third quarter, we've benefited from a much fuller impact for the LIBOR floors.</p>, <p>Third, as you said, we are doing what we can to minimize G&A expenses overall. And so, I'll say this sort of without some extraordinary or somewhat one-time events, we do think operating earnings will remain very consistent for ACRE heading into the third quarter and not materially impacted due to the five loan transactions that we spoke about.</p>, <p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p>, <p>Yeah. And the one thing I'd add...</p>, <p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p>, <p>Oh, go ahead.</p>, <p><strong>Bryan Donohoe</strong> -- <em>Chief Executive Officer</em></p>, <p>Just a quick add on, I think. If you think about a normal capital markets environment, wherein LIBOR floor is at the weighted average of 1.7 or thereabouts, that we have relative to underlying LIBOR at -- in the low-double digits. Normally that would be an inducement for accelerated repayments. And as the -- while some of the capital markets have returned to normalcy, there is still a disruption such that that inducement, while people would love to lower their borrowing costs, we're not seeing that accelerated repayment. So, I think we have some stickier loans there, where we will continue to benefit from those LIBOR floors, while being able to continue to stabilize the Marriott Westchester, as well as pursue some one-off idiosyncratic risk situations that will provide higher yield. So, we're pretty happy with the portfolio and what it's been generating and what we expect it to continue to generate.</p>, <p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p>, <p>The one-off idiosyncratic [Speech Overlap]. Go ahead. Sorry about that.</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>Yeah, Jade. Yeah, I'm sorry. One other thing I just want to add to your question is, in terms of core earnings for the third quarter, I think this should be apparent. But just to make sure that the $4 million mark-to-market loss that we took in the second quarter that impacted GAAP earnings did not impact core earnings since the definition core earnings would add back unrealized gains and losses. Third quarter, as we mentioned, those transaction did close. And so, the impact of that $4 million will go through core earnings in the third quarter. So, I think you're probably already aware of all that, but I just wanted to point that out.</p>, <p><strong>Jade Rahmani</strong> -- <em>Keefe, Bruyette, & Woods, Inc. -- Analyst</em></p>, <p>Right. And would there be somewhat of an offset in the reserve based on that?</p>, <p><strong>Tae-Sik Yoon</strong> -- <em>Chief Financial Officer and Treasurer</em></p>, <p>You mean CECL reserves?</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-3570", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-financials", "tickers": "[\"\"]", "primary_tickers": ["ACRE"], "primary_tickers_companies": ["Ares Commercial Real Estate Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Ares Commercial Real Estate Corp (ACRE) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 4, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-3570"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-3570", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-financials", "tickers": "[\"\"]", "primary_tickers": ["ACRE"], "primary_tickers_companies": ["Ares Commercial Real Estate Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Ares Commercial Real Estate Corp (ACRE) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 4, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ACRE earnings call for the period ending June 30, 2020. | Good afternoon, and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Second Quarter 2020 Financial Results. As a reminder, this conference is being recorded on August 6, 2020.\n I will now turn the call over to Veronica Mayer from Investor Relations. Please go ahead.\n Good afternoon, and thank you for joining us on today's conference call. I am joined today by our CEO, Bryan Donohoe; David Roth, our President; Tae-Sik Yoon, our CFO; and Carl Drake, our Head of Public Company Investor Relations.\n In addition to our press release and the 10-Q that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.\n Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The Company's actual results could differ materially from those expressed in these forward-looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements.\n During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, and these measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures used by other companies.\n With that, I will now turn the call over to Bryan Donohoe.\n Thanks, Veronica, and good afternoon, everyone. At the onset of the COVID-19 pandemic and its disruptions to the real estate markets, we immediately set several goals and objectives. We aim to maintain stable earnings and use our asset management capabilities to preserve our strong credit quality. We also sought out opportunities to selectively divest certain assets to enhance our liquidity and manage risk exposure.\n With respect to the balance sheet, we focused on managing our lender relationships and reducing overall leverage. Our overarching goal was to execute on these objectives and protect shareholder value, and I'm pleased to say that we have made progress in all of these areas during the second quarter and into this current quarter.\n The work that we completed leading into 2020 has given us a very strong foundation to weather significant economic headwinds. For example, over the last few years we strategically positioned our portfolio to be conservative and well-diversified. The portfolio was comprised of 95% senior loans across 50 investments in 17 different markets with limited exposure to gateway cities. We focused our originations primarily on multifamily, office and industrial properties with limited exposure to hotels and retail. We also built in LIBOR floors to protect our earnings in low interest rate environments.\n Furthermore, we maintained diversified sources of funding, particularly with respect to hotel loans and we refused to finance our loans with spread-based mark-to-market facilities. As a result, we are proud that our portfolio has performed well, and that our balance sheet remains sound. We have not made any fundamental changes to our business, but rather we have focused on opportunities to enhance our position, and we're excited about the outlook for our Company.\n Let me now walk through our financial results at a high-level, and some of the specific progress we made. This morning, we reported consistent core EPS of $0.32 per share, and GAAP EPS of $0.29 as our earnings continue to benefit from our diversified portfolio and the LIBOR floor protection on nearly all of our loans. During the second quarter, our portfolio quality improved as the number of loans on non-accrual status declined and our overall internal credit risk ratings improved. 100% of our loans held for investment made their contractual debt service payments through July, including the three loans that remain on non-accrual status. Two loans representing 2% of our loans held for investment, as measured by outstanding principal balance, are under short-term contractual forbearance agreements.\n Our internal risk ratings also improved. On a 1 to 5 rating scale, with 1 being the lowest and 5 being the highest, 91% of our loans rated a 3 or better versus 84% last quarter. Our non-accruing loans declined from 6% of unpaid principal balance to 4%, including the removal of one hotel loan where we extended the upcoming maturity of the loan in exchange for a partial debt pay down and the funding of substantial interest in operating reserves from the sponsor.\n During the second quarter and subsequent to quarter end, we also took steps to increase our liquidity and manage our risk by prudently divesting selected assets through five transactions. First, we refinanced two loans secured by multifamily properties in Florida, totaling $138 million. Post closing, we transferred the subordinate interest in the two loans to a third-party and subsequently financed our senior position through our securitization. On a net basis, this transaction resulted in $35 million in cash, while at the same time, derisking our position. We enhanced our liquidity, while creating attractive interest earning loans backed by multifamily properties.\n Subsequent to quarter end, we sold three loans, two secured by multifamily properties and one by a hotel property. These five transactions totaled $238 million in unpaid principal balance and generated $60 million of net cash. The average price for the five loans was 97% of par value, which included three loans at par, one at 95% of par, and one non-performing hotel loan at 92.5% of par.\n Following the sale of the hotel loan, our overall hotel loan exposure decreased by $31 million to $237 million in outstanding principal balance across five loans. In total, the five loan transactions helped improve our cash position to $80 million as of August 5, 2020, net of paying our second quarter cash dividend of $0.33 per share on July 15. We also reduced our overall balance sheet leverage, as Tae-Sik will discuss.\n Our dedicated asset management team has worked diligently over the last few months and this can be seen by the credit improvement in our portfolio and our enhanced liquidity. We continue to have constructive dialogue with each of our borrowers, allowing us to navigate uncertainties in the market and to seek to address the issues proactively that occur -- that could occur in the portfolio.\n Going forward, while we continue to actively manage our existing portfolio and our balance sheet liquidity, we believe we have the financial flexibility to go on offense and take advantage of attractive financing opportunities. We are using our extensive relationships and leveraging the power of the Ares platform to see off-market, higher spread, attractive investment opportunities, albeit with less senior leverage available. We are primarily focusing on multifamily properties, industrial properties, offices with long-term leases, as well as self-storage assets, which have historically had less volatility and are more consistently financeable. Our goal is to rigorously preserve our strong credit quality, and thus, every investment is being highly scrutinized for safety and attractive yields.\n With that, I will turn the call over to Tae-Sik.\n Great. Thank you, Bryan, and good afternoon, everyone. Earlier today, we reported consistent core earnings of $10.7 million, or $0.32 per common share, in part as 94% of our loans have LIBOR floors at a weighted average rate of 1.77%, an additional 2% of our loans are fixed rate.\n Our GAAP net income was $9.8 million, or $0.29 per common share. Our GAAP earnings were impacted in the second quarter, primarily due to an unrealized loss of $4 million, or approximately $0.12 per common share in connection with marking to market three loans held for sale that were subsequently sold in the third quarter.\n In addition, our REO property, Westchester Marriott, had a loss of approximately $2.2 million, or $0.06 in the second quarter. While the West -- while the Marriott Westchester had been adversely impacted by the pandemic, like most service hotels focus on business travelers, we have taken numerous initiatives to limit expenses and start to rebuild its revenue base. In essence, we have effectively converted the hotel to a limited service model and we have focused our sales and marketing team to solicit government and other essential workers. We're also benefiting from a significant reduction in competition as a few neighboring hotels are closed or closing, some of which we understand maybe permanent. Our progress is expected to be seen in the third quarter with expected losses to be materially curtailed.\n Turning now to our liquidity, as of yesterday's close, we had approximately $80 million in unrestricted cash. In addition, we believe that we have available to us further sources of liquidity should the need arise. For example, we have remaining unfunded capacity under our FL3 Securitization, and we believe that we could monetize additional loans, particularly those backed by multifamily properties at par or close to par.\n Now, let me discuss our liabilities and debt facilities. As we have said in the past, we have very purposely pursued a strategy of diversifying sources of financing and match funding assets and liabilities. And in the past few months, we have begun to reduce our overall leverage ratios and the share of our liabilities subject to credit-based margin calls. First, following the sale or other monetization of the five loans that Bryan previously discussed, including those that closed after the second quarter, we reduced our debt-to-equity ratio from 3.2 times as of March 31, 2020 to 2.9 times currently, both measured excluding our CECL reserves. On a recourse basis, our debt-to-equity leverage has been reduced to less than 1.9 times. We will continue to pursue opportunities to reduce our leverage further.\n And second, with respect to reducing our liability, subject to credit-based margin calls, we have looked to further term out our financing and have also employed senior subordinate loan structures. For example, for the two multifamily loans totaling $138 million in outstanding principal that we refinanced, shortly after closing, we transferred $38 million of subordinate participations to a third-party while retaining the $100 million interest. You will note in our financials that although the $38 million subordinate participations are junior to our senior positions and not indebtedness to us, the transaction did not qualify as syndications, so that the entire $138 million loan remains consolidated as an asset on our balance sheet with a $38 million subordinate interest presented as a liability on our balance sheet. Again, we bear no obligation to repay the $38 million in junior participations, and such interests are subordinate to our $100 million in senior participations.\n Also, as a reminder, none of our warehouse financing facility contain mark-to-market remargining provisions that are based on changes in market borrowing spreads. Instead, our warehouse lines have remargining provisions based on the credit performance of our loans.\n Finally, our CECL reserve was at $28 million for the quarter ended June 30, down approximately $4 million from the previous quarter. This reduction in the provision was primarily attributable to the three loans that were transferred to loans held for sale, which reduced our CECL reserves by approximately $1.2 million. One additional loan that was repaid that further reduced our CECL reserves by $0.5 million and reduction in the average remaining term for the overall loan portfolio.\n And with that, I will now turn the call back over to Bryan for some closing remarks.\n Thanks, Tae-Sik. To sum it up, we are really proud of the significant progress we have made with respect to our objectives of enhancing liquidity, maintaining strong profitability, and improving credit quality, while protecting shareholder value. We are pleased with the performance of our portfolio and the hard work and dedication of our entire team. We are all stronger for persisting through the last five months together, which makes us better positioned to navigate the road ahead and to take advantage of the opportunities we believe we will find in the market going forward.\n With that, I'd like to ask the operator to open the line for questions.\n | Ares Commercial Real Estate Corp | (NYSE:ACRE) | Aug 6, 2020 | 12:00 p.m. ET | 12 | pm | 2020-08-06 | 2020-08-07 | 2020-08-06 | 2020-08-10 | NYSE | We also sought out opportunities to selectively divest certain assets to enhance our liquidity and manage risk exposure. | We also sought out opportunities to selectively divest certain assets to enhance our liquidity and manage risk exposure. | [0.81647396 0.00683803 0.176688 ] | positive | 0.809636 | 2020-08-10 | 9.360000 | 9.750000 | 9.240000 | 9.740000 | 251702.0 | 9.830000 | 10.250000 | 9.820000 | 10.040000 | 325382.0 | Real Estate | 2020-06-30 | 2020-06-30 | 0.32 | 0.257448 | 2020-06-30 | ACRE | 0.062552 | beat | 0.680000 | increase | 0 | positive |
| 8 | ADAP | /earnings/call-transcripts/2020/08/06/adaptimmune-therapeutics-plc-adap-q2-2020-earnings.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Adaptimmune Therapeutics PLC</strong> <span class="ticker" data-id="335128">(<a href="https://www.fool.com/quote/nasdaq/adaptimmune-therapeutics-plc/adap/">NASDAQ:ADAP</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:00 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Hello, and welcome to Adaptimmune Q2 Financial and Business Update. With me on today's call is Juli Miller.</p><p>Juli, you may begin.</p><p><strong>Juli P. Miller</strong> -- <em>Senior Director of Investor Relations</em></p><p>Good morning, and welcome to Adaptimmune's conference call to discuss our second quarter 2020 financial results. I would ask you to please review the full text of our forward-looking statements from this morning's press release. We anticipate making projections during this call and actual results could differ materially due to a number of factors, including those outlined in our latest filings with the SEC. Adrian Rawcliffe, our Chief Executive Officer, is with me for the prepared portion of this call, and other members of our management team will be available for Q&A.</p><p>With that, I'll turn the call over to Adrian Rawcliffe. Ad?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Thank you, Juli, and thank you, everyone, for joining us. After a strong start to the year, the second quarter of 2020 has continued to be very productive as we make progress to bring the promise of SPEAR T-cell therapy to people with cancer. At ASCO, we reported new responses in gastroesophageal, lung and head and neck cancers. We've now seen responses in a total of six different solid tumor types, including a complete response in a patient with liver cancer. We initiated a Phase II trial, combining ADP-A2M4 with pembrolizumab in head and neck cancer and announced that we would shortly initiate a new Phase II trial in gastroesophageal cancers. We demonstrated continued efficacy and promising durability with ADP-A2M4 in patients with synovial sarcoma and announced that we have screened more than half the patients likely to be required to complete our SPEARHEAD-1 pivotal trial, working with 20 centers in Canada, France, Spain, the U.S. and now also in the U.K., and we remain on track for the U.S. launch of ADP-A2M4 in 2022. In addition, further validating the potential of this product to meet the significant unmet medical need for patients with synovial sarcoma, the European Medicines Agency recently granted us access to PRIME regulatory support. Finally, we raised approximately $244 million and finished the quarter with a total liquidity of $419 million, funding us into 2022 and so enabling us to focus on developing the signals we've seen in our trials and bringing ADP-A2M4 to market for patients with sarcoma.</p><p>For the remainder of 2020, we plan to provide clinical updates at major medical conferences, including an oral presentation by Dr. Bruno Sangro from Navarra University Clinic in Spain, who will present data from the third dose cohort of our ADP-A2AFP trial at the International Liver Congress later this month. We also plan to present updates from our SURPASS trial and additional durability and translational data from patients with synovial sarcoma, our Phase I ADP-A2M4 trial in Q4. We will update data from the radiation sub-study of this trial in 2021 as we have not yet recruited sufficient patients to be meaningful, partially due to the impact of COVID-19, the next topic I want to cover. Like most pharma and biotech companies, and as discussed last quarter, we have experienced recruitment delays in our clinical trials, but we and the centers we work with have done everything possible to carry on and be ready to hit the ground running as the situation allows. We already have active sites across our trials in Europe, the U.K., the U.S. and Canada. And in each of those locations, the impact of COVID-19 is still evolving. And so we've seen variations between regions and between clinical sites as they react to the challenges of a pandemic. We believe that we have seen more of an impact in our early phase trials, for instance with the radiation sub-study conducted MDNS in Cancer Center in Houston, as Texas is a region particularly affected. However, enrollment in our SPEARHEAD-1 pivotal trial has continued to progress well, in part due to the clear opportunity for benefit for patients based on the results seen in synovial sarcoma to date.</p><p>Our SPEAR T-cell manufacturing facility at the Navy Yard has been very busy throughout this period. We have been able to treat some patients, and we believe that others for whom we've manufactured cells will be able to continue on our trials when it's safe to do so. But clearly, this has had an impact on patients in our trials. And while that impact that's clearest across the board in April and May, it continues to impact on a site-by-site or country-by-country basis as the pandemic evolves, particularly in the United States. Later this year, we plan to share patient data updates from our SURPASS trial and ADP-A2AFP trial, for whom we reported top line data earlier this year as well as for any new patients whom we have treated in the intervening period. Looking beyond 2020, we will continue to progress indications with promise into later phase trials, starting with a new Phase II trial in gastroesophageal cancer and test combination therapies and next-generation enhancements as the data guides us. We will also continue to pursue partnership opportunities, such as the deal we completed earlier this year with Astellas, and we will continue to develop our off-the-shelf allogeneic program as part of our future vision for cell therapies for people with cancer. We are also preparing for the future by increasing our manufacturing capacity to meet the needs of the ongoing and planned clinical trials. In addition, our commercial preparation is ramping up, including development of our manufacturing capabilities toward commercial scale. While external partners are important, we remain convinced that for Adaptimmune to be a leader in cell therapy, we need to own the manufacturing process, which enables us to innovate and be more efficient. This includes vector production, where we intend to start using our GMP vector manufactured in our dedicated facility in our SURPASS trial later this year. Throughout this period, I have continued to be humbled by the dedication of my colleagues who have worked tirelessly in the midst of a global pandemic with its associated personal challenges to maintain the ability of patients to receive our therapies and to carry on crucial research on our pipeline.</p><p>I am pleased that we are recently named one of the best places to work in Philadelphia by the Philadelphia Business Journal. Our shared mission, transforming the lives of people with cancer by designing and delivering cell therapies, makes Adaptimmune a place where passionate people who want to cure cancer like to work. However, the ongoing discussion about ratio and equity, particularly as it relates to black lives, should make everyone challenge themselves about whether we are equally welcoming and nurturing to all. As CEO, I'm committed to do everything we can in this course, and I know my colleagues share this commitment to ensure that Adaptimmune is a great place to be, a place where all colleagues feel supported and can see a bright future.</p><p>And now I'll open the call up to questions. Operator?</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-3787">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-3787');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] Our first question comes from the line of Marc Frahm with Cowen & Company. Your line is open. Please go ahead.</p><p><strong>Marc Frahm</strong> -- <em>Cowen & Company -- Analyst</em></p><p>Okay. Thanks for taking my questions. Adrian, in your prepared remarks, you mentioned presenting top line data in new patients, I believe, for both the SURPASS and AFP programs. Is that AFP presentation going to happen alongside the EASL presentation of new patients? Or is that going to be later in the year that we'll see additional AFP patients?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>So I'm going to ask Elliot Norry to outline what's coming at the ILC at the end of August and further on in the year with AFP. Elliot?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>Thanks, Ed. So just to be clear about expectations for what will be presented at EASL. First of all, we will not be presenting the non-HCC, non-hepatocellular cancer cohort, at EASL. And what you can mostly expect is an update on safety for the entire trial as well as presentation of the patients in Group 3, which will include at least an update on the patients that we gave top line results for in end of May, around ASCO. And beyond that, there hasn't been much time, and I would not expect considerably more clinical information beyond those patients. And we don't have any specific plans to update AFP further beyond the EASL Conference for the rest of the year.</p><p><strong>Marc Frahm</strong> -- <em>Cowen & Company -- Analyst</em></p><p>Okay. Great. And then maybe, Elliot, if you can also just kind of speak generally, Adrian, kind of highlighted the pushes and pulls on enrollment and patient access to your trials from both the added enthusiasm of seeing responses, but then obviously, the impact of COVID. Can you kind of just speak to where you are today? You know that maybe in some areas could impact has lessened or just people have adapted to it. Today, are you more or less active screening than, say, you were a year ago? How much more?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>So compared to a year ago, that's a I'm not I'd have to go back and look at our screening data to really answer that from a year ago. I can tell you what's really been the trajectory since March, April, when this really started, if that's helpful. We really saw a marked cutback in screening across programs in March and April. And I think that centers were largely concerned that they just didn't have the capacity to manage the patients, concern about ICU beds and just minimizing traffic in their centers and exposure to staff and whatnot. So I do think that things have improved since then, and it really does depend region by region. Some regions have recently gotten worse again, so I don't think that the story is over until we really have a handle on where the virus is heading, and regions could change day-to-day, really. I will say that we are seeing screening across our programs. I think it would have been better, if not for COVID-19, perhaps with the exception of SPEARHEAD-1, where the screening really has met our projections by and large. And we have worked with centers the best of our ability to both sort of respect their needs to protect their employees and manage their patient flow and also to treat patients when we can and advance patients in our trials from screening to manufacturing to treatment when safe and possible. It's hard to be more specific than that without walking around the globe, and what was true a month ago will be different a month from now.</p><p><strong>Marc Frahm</strong> -- <em>Cowen & Company -- Analyst</em></p><p>Okay, great. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from the line of Tony Butler with ROTH Capital. Your line is open. Please go ahead.</p><p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p><p>Good morning. Two questions, if I may. One is on the trial in head and neck cancer where you're sequencing pembrolizumab. And I'd like to understand how you think about dosing pembro relative to a cell therapy. It would be before you actually add the cell therapy or after? Importantly, given that pembro does have an indication in head and neck cancer is, if possible, that the patient population, this is the second question, for which you actually end up screening will be those that may be, in fact, refractory to pembro when you see them, which will be a very interesting experiment in and of itself. I'm trying to understand what would be the patients that you see when you're able to screen them. And then, again, how do you think about sequencing pembro relative to cell therapy?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Tony. I think I'll ask Elliot to walk through the approach of that trial because I think the protocol for that chart because I think that will answer several of those questions, and then maybe we'll loop back if there's something else as well that can be we can help with. Elliot?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>Yes, hi. Thanks again. So that trial, as you may know, we have a trial in progress poster to be presented at ESMO, and that will there won't be data presented, it will just be trial design, and there will be details provided in greater length at that time. In general, though, to answer your question about the sequence, we're generally screening patients who are pembrolizumab naive or have recently started on pembrolizumab, with the idea that when patient when patients either don't respond or progress on pembrolizumab that their cells would be ready for treatment at that time in combination with pembrolizumab. And so and patients who respond to pembrolizumab initially would stay on pembrolizumab as it is indicated for first line of treatment. So we really see this as a first-line as a sequence following first-line pembrolizumab to continue pembrolizumab and receive cells as soon as possible after documenting that patients have not had clinical benefit from pembro alone.</p><p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p><p>That's perfect. But so basically, we get cells in virtually all cases after they've had pembro, and but they will continue on pembro as they get cells. That's fair to say?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>Yes.</p><p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p><p>Thanks, Elliot. Thank you, Adrian.</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Tony.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from the line of Mohit Bansal with Citigroup. Your line is open. Please go ahead.</p><p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p><p>Great, thanks for taking my question. And good morning. So from the so just wanted to follow-up on Tony's question. Can you please help us understand at what what is the time difference between when the patient is either progressing and non-responding to not responding to pembro versus initiation of cell therapy? I'm asking in the context of understanding whether you are administering cell therapy, why patients are progressing versus they have progressed? I mean as in like is there a time point where it is just too late to administer cell therapy after that?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Elliot?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>I'm going to defer sort of greater detail explanation of the study until the ESMO poster. But to generally answer your question, if a patient has progressed beyond to the point of having potential benefit from continued therapy, then it would be the discretion of an investigator to not proceed. But patients who have had pembrolizumab and do not respond have significant unmet medical need, and it's really that position where we're trying to sequence as rapidly as possible so as to not have that patient wait for cell therapy at that point and be ready to go in combination with continued pembrolizumab.</p><p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p><p>Got it. And then another question on liver cancer. So far, we have seen one complete response, and I think two other patients did not respond, if I understand it correctly. Did you see any other biomarkers in these two patients which would be worth noting? And then the follow-up is, do you have some internal bar that these many responses, if you see, you would actually move ahead with the Phase II kind of trial just like you have done with the SPEARHEAD-1 trials?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>Yes. So with respect to additional biomarkers and further details on those patients, I'm going to defer to the presentation that's only a couple of weeks away at the International Liver Congress. There's there are embargoes and whatnot, and we should really just allow Dr. Sangro to make his presentation. With respect to the bar for proceeding to a Phase II study, I think it's more complex than any just single parameter, but we would look for some combination of response rate and duration of response.</p><p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p><p>Got it.</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Previously, Mohit, we've sort of used the rule of thumb of the most whether we're seeing a signal of three out of 10 patients being a good starting benchmark. Now obviously, the two out of two responses that we saw at the lowest dose in SURPASS were sufficient to persuade us that there is a tractable late-stage development program there in gastroesophageal cancers. But more generally speaking, a signal in cell therapy, we think three out of 10 seems reasonable and hence, the ongoing recruitment of patients from cohort in the AFP study to understand and further characterize the response rate and nature of the responses.</p><p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p><p>Thank you, Adrian.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from the line of Michael Schmidt with Guggenheim Securities. Your line is open. Please go ahead.</p><p><strong>Kelsey Goodwin</strong> -- <em>Guggenheim Securities -- Analyst</em></p><p>Hey, This is Kelsey on for Michael. Thanks for taking my question. I guess now that we're seeing responses to TCR therapy across numerous solid tumors, I guess are you noticing any patterns in who or what types of tumors are more likely to respond. And then specifically for the AFP cohort and the non-HCC tumors, I guess what kind of tumors are you seeing in that consort or which tumors do you expect to see?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>So I think that I'll separate it into two answers, first of all, with respect to the MAGE-A4 program. I think that the tumors that we might expect to see responses in going forward are the ones where we've seen a degree of antitumor activity to date, and we previously stated that we'll be focusing the SURPASS study going forward on those tumor types. So that specifically, head and neck, bladder and lung and gastroesophageal. That's not to say that we've exhausted the ability to look at any other tumors, and we may continue to explore that, but that study will focus on those four tumors from the standpoint of how we approach study centers and investigators. I think some of that has to do with the frequency of expression of MAGE-A4 in different tumor types and in those tumors, the degree of expression, but it's also guided by our clinical experience to date. And then with respect to the non-HCC cohort in the AFP study, it's really a variety of tumors that we may see. They are rare tumors. If you look at the frequency of AFP expression and other tumor types, there are some rare gastric cancers that express AFP, cholangiocarcinoma, germ cell tumors, a rare hepatoblastoma. So I think that there are some rare tumor types that we would never really find the numbers to study in individual cohorts on their own, and we had received requests from investigators to try and include these patients with limited treatment options in the study, so we opened a cohort that essentially is a basket of them that are non-HCC tumors.</p><p><strong>Kelsey Goodwin</strong> -- <em>Guggenheim Securities -- Analyst</em></p><p>Got it. Thank you so much.</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>Sure.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from the line of Jim Birchenough with Wells Fargo Securities.Your line is open. Please go ahead.</p><p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p><p>Hi, good morning. It's Nick for Jim this morning. First question is on the SURPASS trial. I believe in May, you announced that dose levels two and three would be launched, and the three patients will be treated at five million cells prior to one expansion cohort. Can you provide an update on those three patients and the timing of opening that expansion cohort and from what expectations investors should have from a data presentation? And then I have a follow-up.</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>So we're not providing updates on the SURPASS patients at this time. We do plan to provide an update later in the year about specific patients, cohorts, etc.</p><p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p><p>Okay. And then obviously, that product is designed such that CD4 T-cells become competent for the T-cell receptor. So have you had the opportunity from patient samples to look at the CD4 T-cells and ensure that they remain competent after you've given them for the patient?</p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p>So it's I hate to be disappointing, but it's sort of the same answer, that we're going to provide information about that at an update later in the year.</p><p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p><p>Okay. I'll try one more, which I suspect is the same answer as well, and that is very earlier in the year yet. Announcing with Astellas, where there was a formal collaboration on induced T-cell programs, and I believe you said that our candidate has been selected. Can you provide any updates on the program?</p><p><strong>Helen Tayton-Martin</strong> -- <em>Chief Business Officer</em></p><p>Yes. This is Helen Tayton-Martin. Happy to take that. I think we also mentioned in our update at the end of May. The first program is moving forward successfully to date. And we joined with Astellas have dominated our first target, which will be an HLA-independent TCR hit program. So a TCR that can see a cell surface protein, a bit like an antibody, but we're not disclosing the target of that joint program, but it is continuing to move forward on time and on track at this point. So we're really pleased with how the collaboration is moving forward.</p><p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p><p>And what is roughly the timeline of moving that into the plan?</p><p><strong>Helen Tayton-Martin</strong> -- <em>Chief Business Officer</em></p><p>So that's something that we are not disclosing at this point in time, and but I would also say that the first programming for clinic will be our MAGE-A4 program using the same technology, but that happens to be further advanced. So please be a tracking forward to some extent it depends on regulatory feedback on some of the CMC processes, etc, but we're not disclosing the, because it's not imminent.</p><p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p><p>Okay, great. Well, thanks for the update.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from the line of Jonathan Chang with SVB Leerink. Your line is open. Please go ahead.</p><p><strong>Jonathan Chang</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Yeah. Hi, good morning. Thanks for taking my questions and congrats on the progress. First question, have the unconfirmed responses with the second-gen MAGE-A4 program reported at the time of ASCO being confirmed at this point?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>So we haven't issued any new information on that, and we will do some of the clinics later on this year.</p><p><strong>Jonathan Chang</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Got it. And second question, I guess, related to that, for both the MAGE-A4 first-gen and second-gen programs, beyond sarcoma, how should we be thinking about durability of responses? What are the reasons for confidence in the durability of responses? And how are you thinking about benchmarks for durability?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Good question. I think the reasons for confidence are looking difficult because, to me, confidence requires data at daytime and patients, and we're in the process of gathering those. So we all understand a lot more about the longevity of the responses and the nature and rate of them as we go through these stats, which are I want to be clear, the SURPASS study, for example, is in dose escalation. The fact that we saw responses at the first doses is fantastic, but it's an early stage study, and we need to get more patients on the study. So I think we'll understand that. And in terms of as we recruit those patients, in terms of the question of what I think benchmarks are, I think that largely depends on the indication and the setting that we're going after. I think we'll have a bit more data, a bit more information to share when we talk about the nature of the gastroesophageal trial that we're setting up later on this year and as we go into next year where I think we've got an understanding of where the benchmarks are in the second and third-line settings. But elsewhere, it's going to depend on what those settings are and what else is out there at the time that we see that signal.</p><p><strong>Jonathan Chang</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Got it. And just last question, zooming with the promising early data from the next-gen MAGE-A4 program, how are you thinking about potential pipeline prioritization with regards to the first generation program?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>That's a really good question. I mean I think the strategically for us, the commitment that we've made is that where we will see a signal such as we have done a very robust signal in sarcoma, and there's a clear unmet medical need, and that signal is definitely there with the first generation program. We are moving forward with that first generation program as fast as we can to market. And I think there's a it's important to do that because the evolution of these products, one, can be quite rapid because we're getting real-time translational data that we can feed back into research and back into the manufacturing, and so there will always be the potential for something better coming down the pipe. And I don't think as a benefit I don't think that benefits anybody to constantly be waiting for the perfect cell therapy product or rather, our objective is where we see significant benefit to patients to move those things quickly as possible. Having said that, the ADP-A2M4 trial has pilot trial has now finished. And rolling with the exception of the radiation sub-study. And so our focus for MAGE-A4, for example, is very much on the SURPASS study, the second-generation program on the combination of the Gen one with the head in head and neck cancer with pembrolizumab and on the radiation sub-study, so augmented approaches beyond the Gen one outside of sarcoma, where obviously, we have the product in that's progressing toward registration. So that's sort of how we think about it conceptually, but we are also I want to raise the point here for generally that I think cell therapy companies have got to get comfortable with the fact that if we are successful, then our emerging research will cannibalize our existing products in as they are on the market. And that's just a feature of this space, of the early stage of the space. And our integrated capabilities enable us to understand that and to prioritize and execute quickly across our pipeline.</p><p><strong>Jonathan Chang</strong> -- <em>SVB Leerink -- Analyst</em></p><p>Thanks for taking the questions.</p><p><strong>John Lunger</strong> -- <em>Chief Patient Supply Officer</em></p><p>Thanks.</p><p><strong>Operator</strong></p><p>Thank you. [Operator Instructions] Our next question comes from the line of Gabriel Fung with Mizuho Securities. Your line is open. Please go ahead.</p><p><strong>Gabriel Fung</strong> -- <em>Mizuho Securities -- Analyst</em></p><p>This is Gabe on behalf of Mara Goldstein. Just have a question here on the data for SURPASS. Could we expect that to be on which target provinces? And also on the manufacturing, are there any expected differences in yield and cost using the Navy Yard facility to manufacture sales for SPEARHEAD?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Sure. So I'll take the first one on SURPASS. And if you look very carefully in the headlines of our press release, you'll see that we're guiding to Q4 for that and ESMO in September. So the answer to that is no, it's not going to be at ESMO. And then secondly, the I'll hand over to John to talk about the Navy Yard manufacturing and costs of that.</p><p><strong>John Lunger</strong> -- <em>Chief Patient Supply Officer</em></p><p>Yes. So in terms of this is John. In terms of the manufacturing cost, one of the things that we mentioned earlier is that we have our own in-house vector, which we plan to use later on in the year. So certainly, in-sourcing vector will have a positive impact on COGS. One other thing we're also continuing to do is just optimize how we actually run the Navy Yard facility. So we're investing a fair bit of time and resources in electronic systems, for example, which allow us to optimize the process and reduce the overhead that goes into each one of those. So I'd say that it's a continuous process of improving our cost, and we're making some fairly big step changes in terms of efficiency and optimization as we go along.</p><p><strong>Gabriel Fung</strong> -- <em>Mizuho Securities -- Analyst</em></p><p>Great. And actually, just one really quick follow-up here. I was just wondering, has the company ever or actually, how does company think about exploring your assets your candidates in the outpatient setting, whether or not this could be a potential use in the future?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Helen, do you want to talk to that?</p><p><strong>Helen Tayton-Martin</strong> -- <em>Chief Business Officer</em></p><p>Yes. Yes, this is Helen. That's a great question. I think the answer is, yes, we are exploring that. We're thinking about that, but it's too seems to say exactly what that will look at as we roll forward. Clearly, the ability to treat depend quite a bit on safety as much as anything. So I think and we're quite pleased with how that has been tracking with our therapy. So yes, we are exploring it. But at this point, don't have a definitive answer as to how that will look.</p><p><strong>Gabriel Fung</strong> -- <em>Mizuho Securities -- Analyst</em></p><p>Thanks everybody.</p><p><strong>Helen Tayton-Martin</strong> -- <em>Chief Business Officer</em></p><p>Thanks.</p><p><strong>Operator</strong></p><p>Thank you. And we do have another question from the line of Tony Butler with ROTH Capital. Your line is open. Please go ahead.</p><p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p><p>Yes, thanks very much for letting me ask another. I'll be brief. Elliot, you made an enlightening comment about research cannibalizing existing products and then with respect to Helen's last comment on the community setting in effect as you think about outpatient. The question really, outpatient therapy, the question really is around multiple dosing options. Right now, clearly, most therapy companies have a single dose. Redosing is just is it's interesting, and there's a lot of exploration. But I'm just curious in the grand scheme of things when we want to fast forward. Do you all share or does Adaptimmune share the view that really truly cures are going to come when you have multi-dose optionality such that a single dose is most unlikely to generate cures, at least as we think across a variety of solid tumors?</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Yes. So maybe I'll take it. I think the short answer is we don't know, Tony, what the dynamic is between dosing and/or single versus multi antigen approaches, in order to get to curative therapies or any other facet that we and others are looking at in order to get to broadly curative therapies. We do we have experience of redosing patients in our trials. And we have, I would suggest that is somewhat mixed. There are definitely some patients who have responded to the second infusion of cells, and there are some patients where there isn't a response. And bearing in mind, we're only redosing in patients where there is continued expression of the target antigen. So I think the jury is out on whether second multiple dosing will be required. I think in the context of the current paradigm of lymphodepletion, that obviously puts an extra hurdle on second or third dosing. So to the extent that there's evolution around the lymphodepletion regimen, that would be interesting to help get to a place where more routine dosing is possible. And then lastly, it's obvious that different product formats, and in particular, we think about our allogeneic platform, make multiple dosing potentially easier as well as potentially being able to address some of the other drivers that might lead to more prolonged durable responses and potentially, even a curative therapy in due course as well. So and we will continue to explore all of those elements as we think about how best to treat the patients with our cell therapies.</p><p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p><p>Thank you, Adrian.</p><p><strong>Operator</strong></p><p>Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Adrian Rawcliffe for any further remarks.</p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p>Thank you very much. And thanks, everybody, for your time and your questions today. We've made great progress in the first half of 2020. We've pushed forward with the products in sarcoma aggressively, and we are generating responses across a broad range of solid tumors. And I look forward to updating you all as we continue to make progress to bring our SPEAR T-cells to people with cancer. And with that, we'll close the call. Thank you.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 41 minutes</strong></p><h2>Call participants:</h2><p><strong>Juli P. Miller</strong> -- <em>Senior Director of Investor Relations</em></p><p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p><p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p><p><strong>Helen Tayton-Martin</strong> -- <em>Chief Business Officer</em></p><p><strong>John Lunger</strong> -- <em>Chief Patient Supply Officer</em></p><p><strong>Marc Frahm</strong> -- <em>Cowen & Company -- Analyst</em></p><p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p><p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p><p><strong>Kelsey Goodwin</strong> -- <em>Guggenheim Securities -- Analyst</em></p><p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p><p><strong>Jonathan Chang</strong> -- <em>SVB Leerink -- Analyst</em></p><p><strong>Gabriel Fung</strong> -- <em>Mizuho Securities -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/adap">More ADAP analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Adaptimmune Therapeutics plc</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAdaptimmune%2520Therapeutics%2520plc%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=9cd48cc2-76fe-4e27-bb3e-ee35d9a61c8b">ten best stocks</a></strong> for investors to buy right now… and Adaptimmune Therapeutics plc wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAdaptimmune%2520Therapeutics%2520plc%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=9cd48cc2-76fe-4e27-bb3e-ee35d9a61c8b" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-88038", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ADAP"], "primary_tickers_companies": ["Adaptimmune Therapeutics plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adaptimmune Therapeutics PLC (ADAP) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-88038"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-88038", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ADAP"], "primary_tickers_companies": ["Adaptimmune Therapeutics plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adaptimmune Therapeutics PLC (ADAP) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ADAP earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Adaptimmune Therapeutics PLC</strong> <span class="ticker" data-id="335128">(<a href="https://www.fool.com/quote/nasdaq/adaptimmune-therapeutics-plc/adap/">NASDAQ:ADAP</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:00 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Hello, and welcome to Adaptimmune Q2 Financial and Business Update. With me on today's call is Juli Miller.</p>, <p>Juli, you may begin.</p>, <p><strong>Juli P. Miller</strong> -- <em>Senior Director of Investor Relations</em></p>, <p>Good morning, and welcome to Adaptimmune's conference call to discuss our second quarter 2020 financial results. I would ask you to please review the full text of our forward-looking statements from this morning's press release. We anticipate making projections during this call and actual results could differ materially due to a number of factors, including those outlined in our latest filings with the SEC. Adrian Rawcliffe, our Chief Executive Officer, is with me for the prepared portion of this call, and other members of our management team will be available for Q&A.</p>, <p>With that, I'll turn the call over to Adrian Rawcliffe. Ad?</p>, <p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p>, <p>Thank you, Juli, and thank you, everyone, for joining us. After a strong start to the year, the second quarter of 2020 has continued to be very productive as we make progress to bring the promise of SPEAR T-cell therapy to people with cancer. At ASCO, we reported new responses in gastroesophageal, lung and head and neck cancers. We've now seen responses in a total of six different solid tumor types, including a complete response in a patient with liver cancer. We initiated a Phase II trial, combining ADP-A2M4 with pembrolizumab in head and neck cancer and announced that we would shortly initiate a new Phase II trial in gastroesophageal cancers. We demonstrated continued efficacy and promising durability with ADP-A2M4 in patients with synovial sarcoma and announced that we have screened more than half the patients likely to be required to complete our SPEARHEAD-1 pivotal trial, working with 20 centers in Canada, France, Spain, the U.S. and now also in the U.K., and we remain on track for the U.S. launch of ADP-A2M4 in 2022. In addition, further validating the potential of this product to meet the significant unmet medical need for patients with synovial sarcoma, the European Medicines Agency recently granted us access to PRIME regulatory support. Finally, we raised approximately $244 million and finished the quarter with a total liquidity of $419 million, funding us into 2022 and so enabling us to focus on developing the signals we've seen in our trials and bringing ADP-A2M4 to market for patients with sarcoma.</p>, <p>For the remainder of 2020, we plan to provide clinical updates at major medical conferences, including an oral presentation by Dr. Bruno Sangro from Navarra University Clinic in Spain, who will present data from the third dose cohort of our ADP-A2AFP trial at the International Liver Congress later this month. We also plan to present updates from our SURPASS trial and additional durability and translational data from patients with synovial sarcoma, our Phase I ADP-A2M4 trial in Q4. We will update data from the radiation sub-study of this trial in 2021 as we have not yet recruited sufficient patients to be meaningful, partially due to the impact of COVID-19, the next topic I want to cover. Like most pharma and biotech companies, and as discussed last quarter, we have experienced recruitment delays in our clinical trials, but we and the centers we work with have done everything possible to carry on and be ready to hit the ground running as the situation allows. We already have active sites across our trials in Europe, the U.K., the U.S. and Canada. And in each of those locations, the impact of COVID-19 is still evolving. And so we've seen variations between regions and between clinical sites as they react to the challenges of a pandemic. We believe that we have seen more of an impact in our early phase trials, for instance with the radiation sub-study conducted MDNS in Cancer Center in Houston, as Texas is a region particularly affected. However, enrollment in our SPEARHEAD-1 pivotal trial has continued to progress well, in part due to the clear opportunity for benefit for patients based on the results seen in synovial sarcoma to date.</p>, <p>Our SPEAR T-cell manufacturing facility at the Navy Yard has been very busy throughout this period. We have been able to treat some patients, and we believe that others for whom we've manufactured cells will be able to continue on our trials when it's safe to do so. But clearly, this has had an impact on patients in our trials. And while that impact that's clearest across the board in April and May, it continues to impact on a site-by-site or country-by-country basis as the pandemic evolves, particularly in the United States. Later this year, we plan to share patient data updates from our SURPASS trial and ADP-A2AFP trial, for whom we reported top line data earlier this year as well as for any new patients whom we have treated in the intervening period. Looking beyond 2020, we will continue to progress indications with promise into later phase trials, starting with a new Phase II trial in gastroesophageal cancer and test combination therapies and next-generation enhancements as the data guides us. We will also continue to pursue partnership opportunities, such as the deal we completed earlier this year with Astellas, and we will continue to develop our off-the-shelf allogeneic program as part of our future vision for cell therapies for people with cancer. We are also preparing for the future by increasing our manufacturing capacity to meet the needs of the ongoing and planned clinical trials. In addition, our commercial preparation is ramping up, including development of our manufacturing capabilities toward commercial scale. While external partners are important, we remain convinced that for Adaptimmune to be a leader in cell therapy, we need to own the manufacturing process, which enables us to innovate and be more efficient. This includes vector production, where we intend to start using our GMP vector manufactured in our dedicated facility in our SURPASS trial later this year. Throughout this period, I have continued to be humbled by the dedication of my colleagues who have worked tirelessly in the midst of a global pandemic with its associated personal challenges to maintain the ability of patients to receive our therapies and to carry on crucial research on our pipeline.</p>, <p>I am pleased that we are recently named one of the best places to work in Philadelphia by the Philadelphia Business Journal. Our shared mission, transforming the lives of people with cancer by designing and delivering cell therapies, makes Adaptimmune a place where passionate people who want to cure cancer like to work. However, the ongoing discussion about ratio and equity, particularly as it relates to black lives, should make everyone challenge themselves about whether we are equally welcoming and nurturing to all. As CEO, I'm committed to do everything we can in this course, and I know my colleagues share this commitment to ensure that Adaptimmune is a great place to be, a place where all colleagues feel supported and can see a bright future.</p>, <p>And now I'll open the call up to questions. Operator?</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-3787">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-3787');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Our first question comes from the line of Marc Frahm with Cowen & Company. Your line is open. Please go ahead.</p>, <p><strong>Marc Frahm</strong> -- <em>Cowen & Company -- Analyst</em></p>, <p>Okay. Thanks for taking my questions. Adrian, in your prepared remarks, you mentioned presenting top line data in new patients, I believe, for both the SURPASS and AFP programs. Is that AFP presentation going to happen alongside the EASL presentation of new patients? Or is that going to be later in the year that we'll see additional AFP patients?</p>, <p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p>, <p>So I'm going to ask Elliot Norry to outline what's coming at the ILC at the end of August and further on in the year with AFP. Elliot?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>Thanks, Ed. So just to be clear about expectations for what will be presented at EASL. First of all, we will not be presenting the non-HCC, non-hepatocellular cancer cohort, at EASL. And what you can mostly expect is an update on safety for the entire trial as well as presentation of the patients in Group 3, which will include at least an update on the patients that we gave top line results for in end of May, around ASCO. And beyond that, there hasn't been much time, and I would not expect considerably more clinical information beyond those patients. And we don't have any specific plans to update AFP further beyond the EASL Conference for the rest of the year.</p>, <p><strong>Marc Frahm</strong> -- <em>Cowen & Company -- Analyst</em></p>, <p>Okay. Great. And then maybe, Elliot, if you can also just kind of speak generally, Adrian, kind of highlighted the pushes and pulls on enrollment and patient access to your trials from both the added enthusiasm of seeing responses, but then obviously, the impact of COVID. Can you kind of just speak to where you are today? You know that maybe in some areas could impact has lessened or just people have adapted to it. Today, are you more or less active screening than, say, you were a year ago? How much more?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>So compared to a year ago, that's a I'm not I'd have to go back and look at our screening data to really answer that from a year ago. I can tell you what's really been the trajectory since March, April, when this really started, if that's helpful. We really saw a marked cutback in screening across programs in March and April. And I think that centers were largely concerned that they just didn't have the capacity to manage the patients, concern about ICU beds and just minimizing traffic in their centers and exposure to staff and whatnot. So I do think that things have improved since then, and it really does depend region by region. Some regions have recently gotten worse again, so I don't think that the story is over until we really have a handle on where the virus is heading, and regions could change day-to-day, really. I will say that we are seeing screening across our programs. I think it would have been better, if not for COVID-19, perhaps with the exception of SPEARHEAD-1, where the screening really has met our projections by and large. And we have worked with centers the best of our ability to both sort of respect their needs to protect their employees and manage their patient flow and also to treat patients when we can and advance patients in our trials from screening to manufacturing to treatment when safe and possible. It's hard to be more specific than that without walking around the globe, and what was true a month ago will be different a month from now.</p>, <p><strong>Marc Frahm</strong> -- <em>Cowen & Company -- Analyst</em></p>, <p>Okay, great. Thank you.</p>, <p><strong>Operator</strong></p>, <p>Thank you. And our next question comes from the line of Tony Butler with ROTH Capital. Your line is open. Please go ahead.</p>, <p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p>, <p>Good morning. Two questions, if I may. One is on the trial in head and neck cancer where you're sequencing pembrolizumab. And I'd like to understand how you think about dosing pembro relative to a cell therapy. It would be before you actually add the cell therapy or after? Importantly, given that pembro does have an indication in head and neck cancer is, if possible, that the patient population, this is the second question, for which you actually end up screening will be those that may be, in fact, refractory to pembro when you see them, which will be a very interesting experiment in and of itself. I'm trying to understand what would be the patients that you see when you're able to screen them. And then, again, how do you think about sequencing pembro relative to cell therapy?</p>, <p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p>, <p>Thanks, Tony. I think I'll ask Elliot to walk through the approach of that trial because I think the protocol for that chart because I think that will answer several of those questions, and then maybe we'll loop back if there's something else as well that can be we can help with. Elliot?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>Yes, hi. Thanks again. So that trial, as you may know, we have a trial in progress poster to be presented at ESMO, and that will there won't be data presented, it will just be trial design, and there will be details provided in greater length at that time. In general, though, to answer your question about the sequence, we're generally screening patients who are pembrolizumab naive or have recently started on pembrolizumab, with the idea that when patient when patients either don't respond or progress on pembrolizumab that their cells would be ready for treatment at that time in combination with pembrolizumab. And so and patients who respond to pembrolizumab initially would stay on pembrolizumab as it is indicated for first line of treatment. So we really see this as a first-line as a sequence following first-line pembrolizumab to continue pembrolizumab and receive cells as soon as possible after documenting that patients have not had clinical benefit from pembro alone.</p>, <p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p>, <p>That's perfect. But so basically, we get cells in virtually all cases after they've had pembro, and but they will continue on pembro as they get cells. That's fair to say?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>Yes.</p>, <p><strong>Tony Butler</strong> -- <em>ROTH Capital -- Analyst</em></p>, <p>Thanks, Elliot. Thank you, Adrian.</p>, <p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p>, <p>Thanks, Tony.</p>, <p><strong>Operator</strong></p>, <p>Thank you. And our next question comes from the line of Mohit Bansal with Citigroup. Your line is open. Please go ahead.</p>, <p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p>, <p>Great, thanks for taking my question. And good morning. So from the so just wanted to follow-up on Tony's question. Can you please help us understand at what what is the time difference between when the patient is either progressing and non-responding to not responding to pembro versus initiation of cell therapy? I'm asking in the context of understanding whether you are administering cell therapy, why patients are progressing versus they have progressed? I mean as in like is there a time point where it is just too late to administer cell therapy after that?</p>, <p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p>, <p>Elliot?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>I'm going to defer sort of greater detail explanation of the study until the ESMO poster. But to generally answer your question, if a patient has progressed beyond to the point of having potential benefit from continued therapy, then it would be the discretion of an investigator to not proceed. But patients who have had pembrolizumab and do not respond have significant unmet medical need, and it's really that position where we're trying to sequence as rapidly as possible so as to not have that patient wait for cell therapy at that point and be ready to go in combination with continued pembrolizumab.</p>, <p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p>, <p>Got it. And then another question on liver cancer. So far, we have seen one complete response, and I think two other patients did not respond, if I understand it correctly. Did you see any other biomarkers in these two patients which would be worth noting? And then the follow-up is, do you have some internal bar that these many responses, if you see, you would actually move ahead with the Phase II kind of trial just like you have done with the SPEARHEAD-1 trials?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>Yes. So with respect to additional biomarkers and further details on those patients, I'm going to defer to the presentation that's only a couple of weeks away at the International Liver Congress. There's there are embargoes and whatnot, and we should really just allow Dr. Sangro to make his presentation. With respect to the bar for proceeding to a Phase II study, I think it's more complex than any just single parameter, but we would look for some combination of response rate and duration of response.</p>, <p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p>, <p>Got it.</p>, <p><strong>Adrian Rawcliffe</strong> -- <em>Chief Executive Officer</em></p>, <p>Previously, Mohit, we've sort of used the rule of thumb of the most whether we're seeing a signal of three out of 10 patients being a good starting benchmark. Now obviously, the two out of two responses that we saw at the lowest dose in SURPASS were sufficient to persuade us that there is a tractable late-stage development program there in gastroesophageal cancers. But more generally speaking, a signal in cell therapy, we think three out of 10 seems reasonable and hence, the ongoing recruitment of patients from cohort in the AFP study to understand and further characterize the response rate and nature of the responses.</p>, <p><strong>Mohit Bansal</strong> -- <em>Citigroup -- Analyst</em></p>, <p>Thank you, Adrian.</p>, <p><strong>Operator</strong></p>, <p>Thank you. And our next question comes from the line of Michael Schmidt with Guggenheim Securities. Your line is open. Please go ahead.</p>, <p><strong>Kelsey Goodwin</strong> -- <em>Guggenheim Securities -- Analyst</em></p>, <p>Hey, This is Kelsey on for Michael. Thanks for taking my question. I guess now that we're seeing responses to TCR therapy across numerous solid tumors, I guess are you noticing any patterns in who or what types of tumors are more likely to respond. And then specifically for the AFP cohort and the non-HCC tumors, I guess what kind of tumors are you seeing in that consort or which tumors do you expect to see?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>So I think that I'll separate it into two answers, first of all, with respect to the MAGE-A4 program. I think that the tumors that we might expect to see responses in going forward are the ones where we've seen a degree of antitumor activity to date, and we previously stated that we'll be focusing the SURPASS study going forward on those tumor types. So that specifically, head and neck, bladder and lung and gastroesophageal. That's not to say that we've exhausted the ability to look at any other tumors, and we may continue to explore that, but that study will focus on those four tumors from the standpoint of how we approach study centers and investigators. I think some of that has to do with the frequency of expression of MAGE-A4 in different tumor types and in those tumors, the degree of expression, but it's also guided by our clinical experience to date. And then with respect to the non-HCC cohort in the AFP study, it's really a variety of tumors that we may see. They are rare tumors. If you look at the frequency of AFP expression and other tumor types, there are some rare gastric cancers that express AFP, cholangiocarcinoma, germ cell tumors, a rare hepatoblastoma. So I think that there are some rare tumor types that we would never really find the numbers to study in individual cohorts on their own, and we had received requests from investigators to try and include these patients with limited treatment options in the study, so we opened a cohort that essentially is a basket of them that are non-HCC tumors.</p>, <p><strong>Kelsey Goodwin</strong> -- <em>Guggenheim Securities -- Analyst</em></p>, <p>Got it. Thank you so much.</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>Sure.</p>, <p><strong>Operator</strong></p>, <p>Thank you. And our next question comes from the line of Jim Birchenough with Wells Fargo Securities.Your line is open. Please go ahead.</p>, <p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p>, <p>Hi, good morning. It's Nick for Jim this morning. First question is on the SURPASS trial. I believe in May, you announced that dose levels two and three would be launched, and the three patients will be treated at five million cells prior to one expansion cohort. Can you provide an update on those three patients and the timing of opening that expansion cohort and from what expectations investors should have from a data presentation? And then I have a follow-up.</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>So we're not providing updates on the SURPASS patients at this time. We do plan to provide an update later in the year about specific patients, cohorts, etc.</p>, <p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p>, <p>Okay. And then obviously, that product is designed such that CD4 T-cells become competent for the T-cell receptor. So have you had the opportunity from patient samples to look at the CD4 T-cells and ensure that they remain competent after you've given them for the patient?</p>, <p><strong>Elliot Norry</strong> -- <em>Senior Vice President and Chief Medical Officer</em></p>, <p>So it's I hate to be disappointing, but it's sort of the same answer, that we're going to provide information about that at an update later in the year.</p>, <p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p>, <p>Okay. I'll try one more, which I suspect is the same answer as well, and that is very earlier in the year yet. Announcing with Astellas, where there was a formal collaboration on induced T-cell programs, and I believe you said that our candidate has been selected. Can you provide any updates on the program?</p>, <p><strong>Helen Tayton-Martin</strong> -- <em>Chief Business Officer</em></p>, <p>Yes. This is Helen Tayton-Martin. Happy to take that. I think we also mentioned in our update at the end of May. The first program is moving forward successfully to date. And we joined with Astellas have dominated our first target, which will be an HLA-independent TCR hit program. So a TCR that can see a cell surface protein, a bit like an antibody, but we're not disclosing the target of that joint program, but it is continuing to move forward on time and on track at this point. So we're really pleased with how the collaboration is moving forward.</p>, <p><strong>Nick Abbott</strong> -- <em>Wells Fargo Securities -- Analyst</em></p>, <p>And what is roughly the timeline of moving that into the plan?</p>, <p><strong>Helen Tayton-Martin</strong> -- <em>Chief Business Officer</em></p>, <p>So that's something that we are not disclosing at this point in time, and but I would also say that the first programming for clinic will be our MAGE-A4 program using the same technology, but that happens to be further advanced. So please be a tracking forward to some extent it depends on regulatory feedback on some of the CMC processes, etc, but we're not disclosing the, because it's not imminent.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-88038", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ADAP"], "primary_tickers_companies": ["Adaptimmune Therapeutics plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adaptimmune Therapeutics PLC (ADAP) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-88038"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-88038", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ADAP"], "primary_tickers_companies": ["Adaptimmune Therapeutics plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adaptimmune Therapeutics PLC (ADAP) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 14, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ADAP earnings call for the period ending June 30, 2020. | Hello, and welcome to Adaptimmune Q2 Financial and Business Update. With me on today's call is Juli Miller.\n Juli, you may begin.\n Good morning, and welcome to Adaptimmune's conference call to discuss our second quarter 2020 financial results. I would ask you to please review the full text of our forward-looking statements from this morning's press release. We anticipate making projections during this call and actual results could differ materially due to a number of factors, including those outlined in our latest filings with the SEC. Adrian Rawcliffe, our Chief Executive Officer, is with me for the prepared portion of this call, and other members of our management team will be available for Q&A.\n With that, I'll turn the call over to Adrian Rawcliffe. Ad?\n Thank you, Juli, and thank you, everyone, for joining us. After a strong start to the year, the second quarter of 2020 has continued to be very productive as we make progress to bring the promise of SPEAR T-cell therapy to people with cancer. At ASCO, we reported new responses in gastroesophageal, lung and head and neck cancers. We've now seen responses in a total of six different solid tumor types, including a complete response in a patient with liver cancer. We initiated a Phase II trial, combining ADP-A2M4 with pembrolizumab in head and neck cancer and announced that we would shortly initiate a new Phase II trial in gastroesophageal cancers. We demonstrated continued efficacy and promising durability with ADP-A2M4 in patients with synovial sarcoma and announced that we have screened more than half the patients likely to be required to complete our SPEARHEAD-1 pivotal trial, working with 20 centers in Canada, France, Spain, the U.S. and now also in the U.K., and we remain on track for the U.S. launch of ADP-A2M4 in 2022. In addition, further validating the potential of this product to meet the significant unmet medical need for patients with synovial sarcoma, the European Medicines Agency recently granted us access to PRIME regulatory support. Finally, we raised approximately $244 million and finished the quarter with a total liquidity of $419 million, funding us into 2022 and so enabling us to focus on developing the signals we've seen in our trials and bringing ADP-A2M4 to market for patients with sarcoma.\n For the remainder of 2020, we plan to provide clinical updates at major medical conferences, including an oral presentation by Dr. Bruno Sangro from Navarra University Clinic in Spain, who will present data from the third dose cohort of our ADP-A2AFP trial at the International Liver Congress later this month. We also plan to present updates from our SURPASS trial and additional durability and translational data from patients with synovial sarcoma, our Phase I ADP-A2M4 trial in Q4. We will update data from the radiation sub-study of this trial in 2021 as we have not yet recruited sufficient patients to be meaningful, partially due to the impact of COVID-19, the next topic I want to cover. Like most pharma and biotech companies, and as discussed last quarter, we have experienced recruitment delays in our clinical trials, but we and the centers we work with have done everything possible to carry on and be ready to hit the ground running as the situation allows. We already have active sites across our trials in Europe, the U.K., the U.S. and Canada. And in each of those locations, the impact of COVID-19 is still evolving. And so we've seen variations between regions and between clinical sites as they react to the challenges of a pandemic. We believe that we have seen more of an impact in our early phase trials, for instance with the radiation sub-study conducted MDNS in Cancer Center in Houston, as Texas is a region particularly affected. However, enrollment in our SPEARHEAD-1 pivotal trial has continued to progress well, in part due to the clear opportunity for benefit for patients based on the results seen in synovial sarcoma to date.\n Our SPEAR T-cell manufacturing facility at the Navy Yard has been very busy throughout this period. We have been able to treat some patients, and we believe that others for whom we've manufactured cells will be able to continue on our trials when it's safe to do so. But clearly, this has had an impact on patients in our trials. And while that impact that's clearest across the board in April and May, it continues to impact on a site-by-site or country-by-country basis as the pandemic evolves, particularly in the United States. Later this year, we plan to share patient data updates from our SURPASS trial and ADP-A2AFP trial, for whom we reported top line data earlier this year as well as for any new patients whom we have treated in the intervening period. Looking beyond 2020, we will continue to progress indications with promise into later phase trials, starting with a new Phase II trial in gastroesophageal cancer and test combination therapies and next-generation enhancements as the data guides us. We will also continue to pursue partnership opportunities, such as the deal we completed earlier this year with Astellas, and we will continue to develop our off-the-shelf allogeneic program as part of our future vision for cell therapies for people with cancer. We are also preparing for the future by increasing our manufacturing capacity to meet the needs of the ongoing and planned clinical trials. In addition, our commercial preparation is ramping up, including development of our manufacturing capabilities toward commercial scale. While external partners are important, we remain convinced that for Adaptimmune to be a leader in cell therapy, we need to own the manufacturing process, which enables us to innovate and be more efficient. This includes vector production, where we intend to start using our GMP vector manufactured in our dedicated facility in our SURPASS trial later this year. Throughout this period, I have continued to be humbled by the dedication of my colleagues who have worked tirelessly in the midst of a global pandemic with its associated personal challenges to maintain the ability of patients to receive our therapies and to carry on crucial research on our pipeline.\n I am pleased that we are recently named one of the best places to work in Philadelphia by the Philadelphia Business Journal. Our shared mission, transforming the lives of people with cancer by designing and delivering cell therapies, makes Adaptimmune a place where passionate people who want to cure cancer like to work. However, the ongoing discussion about ratio and equity, particularly as it relates to black lives, should make everyone challenge themselves about whether we are equally welcoming and nurturing to all. As CEO, I'm committed to do everything we can in this course, and I know my colleagues share this commitment to ensure that Adaptimmune is a great place to be, a place where all colleagues feel supported and can see a bright future.\n And now I'll open the call up to questions. Operator?\n | Adaptimmune Therapeutics PLC | (NASDAQ:ADAP) | Aug 6, 2020 | 8:00 a.m. ET | 8 | am | 2020-08-06 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | After a strong start to the year, the second quarter of 2020 has continued to be very productive as we make progress to bring the promise of SPEAR T-cell therapy to people with cancer. | After a strong start to the year, the second quarter of 2020 has continued to be very productive as we make progress to bring the promise of SPEAR T-cell therapy to people with cancer. | [0.87003404 0.00789653 0.12206943] | positive | 0.862138 | 2020-08-07 | 8.630000 | 8.660000 | 7.930000 | 8.060000 | 1237466.0 | 8.060000 | 8.180000 | 7.870000 | 7.980000 | 875544.0 | Biotechnology | 2020-06-30 | 2020-06-30 | -0.24 | -0.240037 | 2020-06-30 | ADAP | 0.000037 | beat | -0.650000 | decrease | 0 | positive |
| 9 | ADNT | /earnings/call-transcripts/2020/08/06/adient-plc-adnt-q3-2020-earnings-call-transcript.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Adient plc</strong> <span class="ticker" data-id="338729">(<a href="https://www.fool.com/quote/nyse/adient-plc/adnt/">NYSE:ADNT</a>)</span><br/>Q3 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:30 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Welcome to Adient's Third Quarter Financial Results Call. [Operator Instructions]</p><p>I would now like to turn the call over to Mark Oswald. Thank you. You may begin.</p><p><strong>Mark Oswald</strong> -- <em>Vice President-Investor Relations And Corporate Communications</em></p><p>Thank you, Amanda. Good morning, and thank you for joining us as we review Adient's results for the third quarter of fiscal year 2020. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q3 results and outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements.</p><p>These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements. Please refer to slide two of our presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments.</p><p>I'll now turn the call over to Doug. Doug?</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Thanks, Mark. Good morning. Thanks to our investors, prospective investors and analysts joining the call this morning, spending time with us as we review our third quarter results. I hope you and your families are staying safe and healthy in these difficult times. Turning to slide four. Let me begin with a few comments related to our turnaround plan. First off, the team remains laser-focused on the plant while navigating through the global pandemic. We continue to implement actions to ensure the plan progresses in a positive direction. When looking at our results, you'll see operational improvements are driving down waste inefficiencies. The financial slides within Jeff's section illustrates how our improved business performance partially offset the significant COVID bid headwinds. The team is exercising commercial discipline, resulting in new business wins with a higher return on capital versus outgoing programs. I'll expand on this point in a few minutes.</p><p>Our launch performance continues to make significant strides with and extremely important as we head into critical launch quarter. We're proactively executing measures to take out structural costs to ensure the cost base is aligned with our expected smaller industry. And finally, we're moving closer to closing the two previously announced strategic transactions. The approximate $500 million of our cash proceeds will strengthen our balance sheet and help drive our total liquidity position higher exiting fiscal 2020. Essentially, we have our hands on the wheel and continue to drive initiatives that are within our control. That said, turning to slide five, our third quarter results were significantly impacted by COVID, where you saw industry production essentially at 0 across Europe and Americas in April and slowly resumed operations in May and June. We've highlighted a few of Adient's headline financials since Adient's financial performance is highly dependent and correlated to vehicle production.</p><p>Our results mirrored the overall industry, essentially 0 sales in April, with steadily improvement into May and June. Sales at $1.6 billion were down about $2.6 billion or 60% on a year-over-year basis. I mentioned sales were essentially 0 in April. The exit rate for the quarter was about 75%, the pre-COVID levels for both EMEA and the Americas. Adjusted EBITDA was a loss of $122 million, driven by the significant reduction in sales. We estimated the impact of COVID around $400 million for the quarter. The team did a very good job flexing costs, unfortunately, the capital intensity of our business makes it difficult to offset fixed costs in the environment we were managing through. As production ramped up throughout the quarter, our earnings and margins progressed in a positive direction. With regard to cash, we ended the quarter with just over $1 billion of cash on hand and $1.2 billion of total liquidity. Important to note, cash was significantly impacted by approximately $500 million temporary level trade working capital headwinds resulting from the restart of our operations across Europe and the Americas.</p><p>We expect that a majority of these headwinds will reverse as we move through Q4. As far as the $1.2 billion of liquidity, we expect that we will be at a quarterly low point. In fact, total liquidity is expected to exceed $2 billion by the end of September, before factoring any potential debt repayment as a combination of additional JV dividends, proceeds from our previously announced strategic transactions and the reversal of working capital headwinds mentioned earlier will help drive Adient's total liquidity higher. One other point worth calling out. The value of Adient's strategic joint venture network was highlighted in Q3 as the company collected approximately $240 million in cash dividends in the quarter. Year-to-date, the JV has contributed around $250 million with an additional $30 million expected in Q4. Turning to slide six. Let me spend a few minutes discussing the current state of Adient's operation and restart status, first in the APAC region. In China, the market continues to provide encouraging data points. Adient's China operations have returned to pre-COVID levels, in fact, more than 50% of our plants are running two shifts. China auto sales year-over-year volume continues to grow and improve sequentially.</p><p>Adient's performance has outpaced the market, driven by our favorable customer and platform exposure as premium OEMs and Japanese OEMs have performed extremely well during 2020. Outside of China, certain Asian countries are showing early signs of market recovery. We expect that trend to continue in the coming months. In Europe, the market is recovering, but at a slower pace compared to recoveries in China and the Americas. Potentially all of Adient's operations have really started with the exception of the small JIT facility in the U.K. operations revamp. Production. Adient sales improved month-over-month in Q3, essentially 0 in April to about 75% of pre-COVID levels in the quarter. Based on current customer release schedules, we expect that rate to continue to improve as we move throughout the fourth quarter. Important to note, given production has not fully returned to pre-COVID levels, Adient continues to flex cost structure utilizing furloughs and short-time work as appropriate. We recognize the benefits associated with these programs will lessen over time and have taken proactive measures to address our structural costs in the region.</p><p>More on that in a minute. In the America, all of the Adient's and JV plants have restarted production, similar to Europe. Adient sales have improved sequentially as Q3 progressed and exited the quarter at about 75% of pre-COVID levels. Customer releases for trucks and SUVs are running extremely strong. In some instances, production for certain platforms have returned to pre-COVID levels. While this is an encouraging sign, we remain cautious as rising COVID levels in Southern U.S. and Mexico and restrictive rules in the Chihuahua region in Mexico at risk to the production environment. Turning to slide seven and shifting gears. Let me address a common question related to new and existing business awards that continue to bubble up when meeting with our investor base. Specifically, are we losing business to our competitors? Simple answer, our focus on capital allocation and return on capital is driving profitable business awards, both new and incumbent business. We've studied and reviewed Adient's profitability by customer, by platform, by plant, basically slicing and dicing the data.</p><p>What's clear is that certain businesses and platforms have consistently failed to earn an appropriate return. The team is focused on ensuring an adequate return is realized over the platform life is a key driver in determining which platforms we keep and which platforms we're comfortable walking away from. Over the past 12 months, we've successfully replaced approximately $700 million in consolidated revenue incumbent business with a negative return profile with new business awards, including conquest business with significantly better returns. You can see a few examples on the right-hand side of the slide. In addition, our solid execution and value-add initiatives are driving additional opportunities to quote and win profitable new business. We're excited about Adient's book of business that we'll be launching in the coming years. It's an important component of enhancing our margin profile. Speaking of launches, and turning to slide eight, we've highlighted several critical launches, including the Ford F-150, Adient's second largest platform by revenue. Over the past several quarters, launch management has been a specific focus area, helping to drive Adient's improved operational and financial results.</p><p>Adhering to a robust process around change management, enhanced readiness and program reviews and early escalation of potential issues made a significant impact. Over the past several quarters, we've called out several platforms, including the Cadillac CT5, Chevy Onix, Toyota Corolla, Nissan Leaf, for achieving flawless launch scores, which we define as 0, 0, 100, 100, 90, which breaks down to 0 safety incidents, 0 customer rejects, 100% on-time delivery, 100% achievement of financial targets, within 90 days from the start of production. We're not here to declare victory today, rather, we mention these examples as evidence of the team's hard work and preparedness for the upcoming launches. Turning to slides nine and 10. Let me conclude my comments with an update and the actions that are being taken to execute and position Adient for long-term success. As we discussed in our Q2 earnings and in subsequent investor meetings, Adient took quick and decisive actions to help mitigate the impact of steep production declines experienced across Europe and the Americas as a result of the pandemic.</p><p>Many of these actions, such as furloughing our direct and indirect employees at the plant, enacting salary reductions and salary deferrals above plant, suspending 401k, just to name a few, were temporary in nature. As Adient operations restarted and production increased in Q3, the benefits associated with these measures were reversed. Addressing the company's cost base with structural, more permanent measures is essential as we look to create stronger, more profitable business, especially given Adient's expectation of a smaller industry next year versus fiscal year 2019 and the company's extreme focus on capital allocation and return on capital. The rightsizing actions identified and are being executed include the above measures above plant measures within our operations. The goal is simple, reduce Adient's breakeven point, be free cash flow breakeven or better in fiscal year 2021, even though vehicle production is forecasted to be below pre-COVID levels. We have a lot of work ahead of us to achieve that target, but we're well on our way.</p><p>And in fact, we've identified and are in the process of executing cost reductions between $75 million and $100 million versus 2019 in our central functions and regions. slide 10, we've provided a few examples of these actions that have been announced. I won't read through the actions. But as you can see, the measures are far reaching, impacting above plants and joint venture operations. Certain of the actions identified can be executed rather quickly, such as force reductions that impacted our Americas regions and central functions in late May or actions implemented in Asia earlier this year. Other measures have a much longer lead time, such as significant reduction in personnel planned in Europe. As noted in the middle of the slide, in July, we began negotiations with the works council in Germany to execute force reductions impacting approximately 500 engineering and above plant personnel. The reductions are estimated to result in annual labor savings of about $40 million. It's important to note, a portion of the saving relates to flexing of the cost baselines, in other words, the prevention in margin degradation.</p><p>Given certain of the actions will be implemented in fiscal 2021, we only achieve a partial benefit next year. Full run rate savings are expected for fiscal year '22. Given the size and magnitude of the measures being implemented, we do expect to have an elevated level of restructuring costs running through our financials in the coming quarters. The team is currently finalizing our fiscal 2021 plan. Once completed, we'll be able to provide you an estimate of the size and timing of the charges and the cash outlays associated with these measures. In the end, significantly lower cost base, combined with continued operational improvement and a strengthening platform portfolio is expected to result in a stronger, more profitable business, essentially further positioning Adient for long-term success.</p><p>With that, I'll turn the call over to Jeff, so he can take us through Adient's financial performance for the quarter.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Thanks, Doug. Good morning, everyone. And Doug, I echo your earlier comments and hope everyone is safe and well. Starting on slide 12 and adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side of the page. We will focus our commentary on the adjusted results, which excludes special items that we view as either onetime in nature or otherwise skew important trends in the underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to restructuring costs, asset impairments and purchase accounting amortization. Details of these adjustments are in the appendix of the presentation. Sales were $1.6 billion for the quarter, down about 60% year-over-year, which, as Doug noted, was driven by production stoppages at our customers across Europe and the Americas. Adjusted EBITDA for the quarter was a loss of $122 million. By applying our projected margin on lost sales and netted netting out our various short-term austerity actions, we estimate that COVID cost us approximately $400 million in the quarter.</p><p>However, and as we'll discuss more in a moment, Adient's operations across Europe and America continued to experience improved business performance. With regard to equity income, Q3 fiscal 2019 included $15 million of income related to our interiors business that is no longer part of our consolidation today. Therefore, on an apples-to-apples comparison, Adient's Seating equity income was up $8 million or 15% year-over-year, a very good performance as a result of our China operations continuing to capitalize in the improving China markets. Finally, adjusted net income and EPS were down significantly year-over-year, a loss of $261 million and $2.78 per share, respectively. I'll also point out that our tax expense of $14 million in the quarter contributed to our net loss. For those of you wondering why Adient did not recognize the tax benefit in the current quarter associated with their losses, if you recall, during 2018 and 2019 fiscal years, Adient recorded valuation allowances against the deferred tax assets of many entities located in significant jurisdictions in which it operates, including the United States, Germany, Mexico, the United Kingdom, among others.</p><p>No tax benefits are recognized for losses by entities with valuation allowances, and therefore, tax benefits were not recognized during Q3 by many entities that incurred losses. One last comment on taxes. Similar to Q2 of this year, Adient's third quarter effective tax rate was based on an actual tax rate calculation versus an estimated annual effective tax rate calculation. The continued use of this methodology was necessary due to the uncertainty of the pandemic. Now let's break down our third quarter results in more detail, starting with revenue on slide 13. We reported consolidated sales of $1.6 billion, a year a decrease of almost $2.6 billion compared to the same period a year ago. Lower volume across North America, Europe and Asia was the primary driver of the year-over-year decrease, again, attributed to lost production volume associated with the pandemic.</p><p>In addition, negative impact of currency movements between the two periods impacted the quarter by roughly $100 million. The biggest driver included the Brazilian real, the Czech koruna and the euro. Worth noting on the call out box on the right, consolidated sales in both Europe and Americas were down substantially at the beginning of the quarter, almost 100% for the Americas in April. Both markets improved month-on-month as the quarter progressed, exiting the quarter at between 75% to 80% of pre-COVID levels. In China, Adient sales were strong exiting the quarter, driven by our favorable customer and platform mix. For markets outside of China and Asia, sales began to improve as production volumes returned, but were materially impacted by the pandemic, similar to what we saw in America and Europe. For each of the markets, Adient's sales were in line or better compared to production within the markets. With regard to Adient's unconsolidated Seating revenue, year-over-year results were relatively flat. However, as you peel back the onion, the results varied significantly between unconsolidated sales in China versus unconsolidated sales outside of China.</p><p>In China, driven primarily through our strategic JV network, sales were up 14% year-over-year, excluding FX. The sales performance versus the market is attributable to Adient's strong mix of business, specifically our exposure to luxury and Japanese OEMs. Outside of China, Adient has a variety of unconsolidated JVs. These operations were impacted by the same production stoppages that affected Adient consolidated results. On average, the unconsolidated sales of these JVs were down approximately 60% plus in the most recent quarter. We are encouraged we were encouraged with the sales trend. It's that's positively progressing, again, similar to what we're seeing with our consolidated sales. Moving to slide 14. We've provided a bridge of adjusted EBITDA to show our performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was a loss of $122 million in the quarter versus $205 million last year.</p><p>The impact of significantly lower volumes across Americas, Europe and Asia was the primary driver of the steep year-over-year decline. In addition, and to a much lesser extent, the planned divestiture of YFAI also had a negative impact on the year-over-year comparison as we stopped recording its income last December. Since Adient's financial performance is highly dependent on and correlated to vehicle production, adjusted EBITDA showed steady improvement month-on-month as we moved through the third quarter. In fact, after a horrible April and start to May, our June adjusted EBITDA results were about equal to June 2019 despite sales being down approximately 25% year-over-year. Speaking of monthly results, just one more data point. Excluding in April and May, Adient's margins have improved year-over-year every month through September 2019. Back on the quarter, and as Doug alluded to earlier, partially offsetting the significant volume reduction was improved business performance and lower SG&A costs. Labor and overhead performance, a reduction in SG&A costs, lower ops waste launch and tooling costs were the primary drivers.</p><p>The approximate $45 million reduction in SG&A costs were primarily concentrated between EMEA and Americas and included increased efficiencies and positive benefits associated with the deconsolidation of Adient Aerospace and the divestiture of RECARO. But It's also important to point out, a portion of the improvement, call it, about $20 million, related to temporary benefits associated with employee compensation that are not likely to repeat next year. This temporary benefit was included in the net COVID impact of approximately $400 million. Business improvement, combined with labor and overhead efficiencies and lower SG&A, helped to contain our decremental margins to the mid-teens, call it, 16%, even as certain of the temporary cost reductions began to reverse. For example, the benefit associated with furloughing our direct and indirect plant personnel. This outcome was in line with internal expectations. And if you recall, we mentioned on the Q2 earnings call, the 13% decremental margin experienced in the second quarter would trend higher as Adient's operations restarted but would be contained below the 18% decrementals we typically expect.</p><p>To ensure enough time is allocated to the Q&A portion of the call, we've provided our detailed segment performance slides in the appendix of the presentation. Improved business performance and lower SG&A costs, partially offset by the impact of lower volumes more than offset by the impact of lower volumes is the primary takeaway from the Americas and EMEA region. In Asia, a $15 million improvement in our Seating equity income offset the YFAI equity income from last year, but overall performance was driven by lower volumes and earnings outside of China. Let me now shift to our cash, liquidity and capital structure on slides 15 and 16. For the quarter, adjusted free cash flow, defined as operating cash flow less Capex, was an outflow of $528 million. There were several factors that had a significant impact in the quarter's cash compared to our Q2 ending balance. Excluding Adient's ABL, these factors included, at a high level, lost production. Given sales were down roughly 60%, COVID essentially cost us about two months of production in the quarter.</p><p>We stated heading into the quarter, every month of shutdown cost us approximately $175 million of cash. Therefore, loss production resulted in a burn of roughly $350 million, again, at a very high level. Also a temporary net trade working capital headwind of approximately $530 million heavily impacted Q3. This working capital outcome was expected with the sudden shutdown and subsequent restart of our operations. Q3 working capital headwind is expected to unwind in Q4 and benefit the quarter by approximately $400 million as noted on the right-hand side of the page. For full transparency, I'd also remind everyone in our that in our second quarter, working capital provided an approximate $100 million benefit to cash flow when production immediately ceased, reinforcing Adient's working capital movements tend to smooth out over a period of time. Moving on. Partially offsetting the approximate $880 million of headwinds just mentioned was just over $240 million of dividends received from our China JVs in the quarter. This, of course, was a very good outcome and highlights the value of our strategic joint venture network.</p><p>In fact, for the full year, the dividends expected from China will be $70 million to $80 million higher versus our earlier estimates. In addition to the China dividends, a handful of other positive benefits aided the quarter, such as deferring certain tax payments and VAT-related items, call those benefits around $70 million. Although executing these actions throughout the year enhanced our liquidity and helped us weather the storm, these $70 million of deferrals will need to be paid next year. At the very bottom of the page, you can see we ended the quarter at about $1.2 billion of total liquidity, which included our cash on hand of $1.32 billion, plus $155 million drawn of undrawn capacity under our revolving line of credit. Looking forward, we believe Q3 represented our quarterly low point of liquidity and would expect liquidity to exceed $2 billion by the end of September before factoring in any potential debt repayment. Key drivers would include cash proceeds expected from previously announced transactions, call it, $500 million; additional China JV dividend of about $30 million; the reversal of temporary working capital headwinds; and increased capacity under our revolver.</p><p>On slide 16, in addition to showing our debt and net debt position, which totaled $4.5 billion and $3.5 billion, respectively, at June 30, we've also provided a snapshot of Adient's capital structure. Just a few comments here. We believe this capital structure not only provides flexibility to weather the storm, it provides flexibility to pay down debt after we cycle past the crisis. Subsequent to the quarter close, Adient proactively repaid $179 million drawn previously drawn on the revolver. I'd also note that capacity under the revolver is based on a one-month lag such that Q3 availability was based on May AR and inventory balances. Updating the AR and inventory balances to the end of June increased our revolver availability to approximately $650 million in July or a bit more than $300 million that reported at the end of Q3. Improving Adient's cash generation remains a top priority. As Doug pointed out, the actions Adient has taken and plans to take are designed to improve our earnings and cash flow to be profitable in a smaller sales environment. Once the crisis is in the rearview mirror, we'd look to pay down various excess debt obligations.</p><p>Over time, post crisis, we'd expect to have 0 outstanding balance in the revolver and run with a cash balance somewhere in the $500 million to $600 million range. Finally, a few closing remarks on slide 17. First, we expect the global economic impact of COVID-19 will continue to influence the auto industry and Adient for quite some time. That said, we're encouraged by the green shoots that emerged as we progressed through Q3. Building on the positive trend in vehicle production established in our third quarter, Adient expects vehicle production across Europe and America to continue to improve sequentially in the coming months. Since Adient's financial results are highly dependent on and correlated to vehicle production and based on the environment today, we expect Adient's sales, earnings and margin performance will also trend higher in the coming months. Specifically, we expect Q4 sales to be in the range of $3.3 billion to $3.5 billion. Although this implies a 13% decline versus Q4 last year, at the midpoint, it's important to remember our sales in North America will be impacted by the launch of the F-150.</p><p>Adjusted EBITDA for Q4 is expected to range between $180 million and $200 million. At the midpoint, this would be down versus last year's Q4, but significantly less down than would otherwise be implied by the expected decline in volume. Just to comment on our full year adjusted EBITDA, which is not shown, but I'm assuming you'll do the math, it would settle in around $580 million range at the midpoint of Q4's guide. And as you know, it includes an approximate $500 million impact from COVID. I know many of you will be tempted to take the $1.08 billion and use that as your starting point for fiscal 2021, unfortunately, it's not that simple. The biggest factor being production volumes, which, heading into our fiscal 2021, are very uncertain. More likely than not, we expect volumes to be lower than our COVID-adjusted numbers for 2019. In addition, our portfolio moves, such as the sale of RECARO and the expected sale of fabrics and YFAI, will impact the year-over-year walk into 2021.</p><p>The team is presently finalizing our fiscal 2021 plan, which we plan to share with you later this calendar year. Moving on and back to Q4. Within adjusted EBITDA, equity income will settle in the $50 million to $60 million range, in line with last year after backing out YFAI equity income of $14 million. Based on our customer launch plans, we expect Capex to be about $100 million. And finally, for free cash flow, we'd expect Q4 to be in the range of $300 million to $400 million.</p><p>With that, let's move to the question-and-answer portion of the call. Operator, we'll have our first question.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-43996">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-43996');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] Our first question comes from Brian Johnson with Barclays. Your line is open.</p><p><strong>Jason Stuhldreher</strong> -- <em>Barclays -- Analyst</em></p><p>Hi team, This is Jason Stuhldreher on for Brian. I appreciate the color today. I wanted to just first start on the Q4 outlook and specifically on the production side of things. I think some other suppliers are taking a more conservative stance around Q4. It looks like the production assumptions you lined out are more or less in line with third-party estimates. And so I was wondering if you could just comment on your level of confidence around those Q4 numbers. Are the schedules you're seeing in the first month here kind of validating those Q4 forecasts that others are putting out?</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Yes. I'll start out, and I'll let Jeff provide additional comments. To answer your question directly, yes, the schedules that we have in front of us are pretty consistent with what we are anticipating in Q4. As everyone understands inventory levels for our customers are down, they're trying to replenish the dealers right now. There is a strong desire for our customers to run at peak output, particularly in our key models. And certainly, we value the mix that we have. I would say the only note of caution that I would have is, as we mentioned in our formal remarks, there's still some volatility, if you will, in the volume in that from time to time, our customers are experiencing directly, indirectly COVID-related disruptions in the supply chain, not caused by Adient but caused by other suppliers. So that's a potential risk that's out there. Certainly, demand is not the risk that we see.</p><p><strong>Jason Stuhldreher</strong> -- <em>Barclays -- Analyst</em></p><p>Understood. Okay. And then second question, maybe a little more medium-term focused. As we look at the operational improvements that you've been able to do year-to-date, if I recall, coming into the year, you're looking at maybe around $200 million or so of performance improvements in 2020, and then you were actually ahead of that in Q1 before the shutdown started happening in China. And I guess, as we look at what you've done year-to-date, it looks to be more in like the $300 million range of performance at the plat and program level. And so just kind of curious here, as we look over the next several quarters or even a year or so, at what point do the comps start to become more difficult to extract performance? And I guess I'm wondering, has the COVID issue, has that allowed you to bring forward some of these performance initiatives? And I guess, just how much more runway is there as we look over the next four to five quarters?</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>I'd kind of break the question into two pieces. Certainly, a lot of the performance improvements we expected were in the, I'll say, commercial and operational improvement of the existing business. There was another element, as we improve launch performance, which we have, that would continue to improve our overall performance. The other element that we touched on is ultimately exiting business that was not performing up to our level of, I'll say, tolerance and then bringing on new business that would bring that next wave of operational improvement. So I think there's ample opportunity for us to continue to go down that path. I think COVID kind of suspending that for a period of time as we focused on liquidity. We've taken new actions that we have to put into the equation with anticipated a down market that probably wasn't originally envisioned when we started to articulate a turnaround plan. With regard to, is the environment right, I would say the environment is certainly right for our customers to look at cost reductions. If you just look at it from their perspective, they still are making huge investments, particularly in electrification.</p><p>That was a daunting task. They still have the risk of fines in Europe if they don't meet environmental standards. That was a daunting task before COVID. So COVID in a down market hasn't improved that environment. I know, in fact, in talking with them, it's only increased their appetite to find ways to reduce costs. And when they want to find ways to reduce costs, that creates an opportunity for us. So I'm cautiously optimistic we can continue on our path and maybe even find, as we've mentioned in previous calls, incremental opportunity as customers maybe look to hold on the platform longer, delay launches or engineering and capital investment in program replenishment.</p><p><strong>Jason Stuhldreher</strong> -- <em>Barclays -- Analyst</em></p><p>Okay, thank you very much.</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Well, thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from John Murphy with Bank of America. Your line is open.</p><p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p><p>Good morning, guys. Doug, maybe if I could just follow up on that last question and sort of your discussion there. I mean as you look at this, obviously, as you're going through a rationalization of the business, this kind of disruption is can delay things. I'm just curious, in the context of what you're doing right now, are there any net new cost saves or business processes that going forward as the world normalizes might benefit you above and beyond what you were trying to execute before?</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>So first of all, John, I would say, kind of to the point I was trying to make before, maybe I can reemphasize it. Prior to COVID, I think business was somewhat as normal. And our customers were focused on new launch. They, I think, weren't particularly interested in cost reduction initiatives. Some were, some historically always have been, others were, I'll say, perhaps distracted. I think what COVID did was create an inflection point for them to recalibrate. And when they recalibrated against a down market for the foreseeable coming years, I think they recognized that they really needed to intensify their efforts there.</p><p>Fortunately for us, and we've spent probably the last nine to 12 months anticipating that, certainly not envisioning what COVID might. But to my earlier point that there was going to be a real need for them due to their investments in, whether it was electrification or autonomous vehicles or meeting environmental standards, that maybe they didn't completely appreciate. And I think COVID's been a catalyst for them to say, "Look, we really need to reach out." And this isn't just speculation on my part, this is direct conversations with our customers. I wouldn't say every single customer has come to that conclusion.</p><p>But I think what we found is we've exposed them to the work that we're doing in that area, and it's some pretty impressive work. I mean to say it's VA/VE is just a complete understatement. It's what we call it only because we haven't come up with a better name. But it's really focused on this concept of return on capital investment, how to get scale with a customer without putting in brand-new investment, how to do that quickly. There's a tremendous amount of technology on the shelf right now in the area seating that does not need to be reinvented that can be applied to more than meet or exceed consumer expectations. And it's really directing the customer to say, "Look, you should come and take a look at this on your next-generation program." We've talked a little bit about one program we did that with one customer that just launched an electric vehicle, was going to introduce a next generation of an existing platform that's historically been internal combustion.</p><p>And we said, "Why don't you just take this new architecture and seating systems that you're just launching on electric vehicle and apply it to this next-generation product." And in theory, theoretically, that requires 0 engineering work on your part, 0 capital investment on our part or minimal of us as we just leverage incremental volume off that and arguably minimal capital investment. That's becoming a much more appealing story to our customers, and I would expect that's going to continue.</p><p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p><p>Okay. That's helpful. And then just a second question on the mix benefit in the quarter. And Jeff, on slide 14, you went through the walk, and volume and mix was a headwind of $438 million on EBITDA. I'm just curious, if you were to split that between volume and mix, I mean, how much of a benefit was mix in the quarter? And how sustainable do you at least see that in the near-term schedules are expected to be over time?</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Yes. Good question, John. The I would say the most of what you're seeing there is just pure volume impact. Mix wasn't a huge portion of that $438 million. As it relates to the mix for our fourth quarter, it's probably a little bit down just given the or unfavorable for us just given the launch of the F-150 and how production will go on that. But I'd say for the quarter, I'd take that $438 million as base. For the vast majority for your modeling purposes, I'd call it volume.</p><p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p><p>Okay. That's helpful. And then if you could just, I don't know, illustrate or elucidate where you think 2021 will land in the context of you talking about trying to get to breakeven free cash flow in FY 2021? What is sort of the thought process or the business environment that you're fighting to get to that level in?</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Well, I'd say that there's a lot of components to that and some of them are still being worked as we complete our 2021 plan, John. But as we look through a couple of dynamics here, we've taken a big chunk out of our cost structure with the activities as we've decentralized the company. And those benefits, some have hit this year, but we'll have a full year run rate in 2021. That's going to be a big piece. I think there's going to be opportunities on Capex where we won't be spending at the historical levels. The SS&M business, that's becoming a the improvement level in that business is significant. With a business that had cost us on a simplified free cash flow to, call it, $450 million in 2018-2019 time frame, it's probably half of that, a little bit, give or take, this year. And we'll end next year close to breakeven or we expect it to be really breakeven by the end. Those are going to be big components of the free cash flow story for us next year. But there's some more work to do for us. It's also the continuation of the improvements that you've seen, Doug talked about.</p><p>We're seeing, I'd say, from a program perspective, as I sit through, especially big program reviews, the team, not only they commanded of the data better, the all of it's coming through with better return profiles than what we're seeing in a lot of these key programs. So those are all key components, but I'd say we're pretty optimistic about it. The big challenge for us next year, quite frankly, is going to be Europe in general. There is depending on where the market turns up for next year. We talked about it. Doug talked about it a little bit earlier. But the European market is expected to be down. To restructure to take out cost in Europe is expensive. And so I would expect that in dealing with next year, we are going to have some elevated restructuring costs in Europe.</p><p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p><p>Great. And just one last housekeeping. What's minimum liquidity and cash that you're looking for, Jeff?</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Yes. I'd say we like to see cash, give or take, around the $500 million to $600 million mark. And we're going to have, in a healthy time period, around $1 billion on the ABL, and we would expect that to be undrawn. So give or take, $1.5 million or so on a normalized basis. And we expect quite a bit over that as we end the year with the transactions, the working capital swing back and just the ABL kind of rebuilding the asset base, primarily from accounts receivable.</p><p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p><p>Yeah. Thank you very much.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Thanks, John.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open.</p><p><strong>Rod Lache</strong> -- <em>Wolfe Research -- Analyst</em></p><p>Good morning, everybody. I wanted to ask just two questions. One is trying to think about what your Q4 guidance implies for prospective EBITDA run rate. So ex equity income, if you use the midpoint, your guidance is about $135 million or $540 million annualized. Can you just remind us, what is the seasonality of that? Are there settlements that typically come in, in your September quarter? Maybe some rough estimate of what the F-150 impact is. And as we extrapolate and think about next year, the $75 million to $100 million of savings, is that a net number? Or should we think about nonrecurrence of some of the austerity measures this year maybe subtracting from that?</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Yes. I guess I'll work backwards a bit, Rod. But the $75 million to $100 million is a net number. You can we expected that's not necessarily from our Q4 cost base, although there'll be incrementals to that, too. But from pre-COVID level cost base, we see that as that's what we've been targeting to take out of the business. Some of those costs are going to take the time period for Europe, which is going to be a significant portion of those cost reductions, just with the environment on doing restructuring in Europe, takes some time to enact. So I would expect a lot of those savings won't start to run rate until second or third fiscal quarter for us next year. Some have already started to occur, though, today, so it's a bit of a mix. As it relates to the fourth quarter, it is a this is a pretty uncertain time, I'll be honest, and we opted to put guidance in here.</p><p>And as we look to 2021, I would say you can't necessarily use our Q4 as a guide post for it. The F-150 is a big impact for us in the quarter. We do expect production essentially to switch over in September, and that's going to bring down the old line. And as we start the new with launch cost and have essentially dwindling production on the old, all that will have a big impact on sales and profitability in our Q4. So I'd say more to come, Rod. We'll give you more color on our on our fiscal 2021 plan on our next earnings call. But I would just say the fourth quarter is probably going to be an under guide for you on doing the math.</p><p><strong>Rod Lache</strong> -- <em>Wolfe Research -- Analyst</em></p><p>Okay. Is there a seasonality to settlements or something like that, that we need to keep in mind or no?</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>I'd say most of them sort of happen through the year. But if there's a seasonal point to it, it tends to be in our first quarter, the calendar year-end quarter.</p><p><strong>Rod Lache</strong> -- <em>Wolfe Research -- Analyst</em></p><p>Okay. That makes sense. And then lastly, the $50 million to $60 million equity income in Q4, you said that, that excludes YFAI. Just given that China has recovered quite a bit more, is that a reasonable run rate or something we can extrapolate from? How should we be thinking about the drivers for next year? And is your payout math changing? It looks like this year, you're getting more than the typical 70% or 80% from that market.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Yes. There's a lot of pieces to that question, I suppose. But the payout math was higher this year. If you recall, we were also doing the transaction with YFAI and the change in AYM and the sales on the IP. We were able to extract a higher dividend, in particular, out of that metals venture, the AYM venture. So our payout ratio is significantly higher in 2020 than I would expect necessarily going forward that we've experienced going forward or in the past. So that was a positive for us this year that we were able to pull ahead. As it relates to the I guess, China market, we continue to do well. I'd say the this past quarter turned out to be better than expected as COVID rebound was strong.</p><p>We anticipate that this quarter will be positive as well. Let's see where the run rate actually comes out for Q4. But I would say we do have some seasonality in that business from earnings. They tend to have a pretty strong fiscal Q1 in general. Our first calendar or our first quarter of our fiscal year, the last quarter of the calendar year tends to be a little strong. So you can't necessarily annualize one quarter there.</p><p><strong>Rod Lache</strong> -- <em>Wolfe Research -- Analyst</em></p><p>Okay, great. Thank you.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Thanks, Rob.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from James Picariello with KeyBanc Capital Markets. Your line is open.</p><p><strong>James Picariello</strong> -- <em>KeyBanc Capital Markets -- Analyst</em></p><p>Hey, good morning guys.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Good morning, James.</p><p><strong>James Picariello</strong> -- <em>KeyBanc Capital Markets -- Analyst</em></p><p>So on the timing of the $700 million wind down in unprofitable sales, is that over the next 12 to 24 months? And is there any material air pocket we should be considering with respect to the replacement of that unprofitable mix with new programs and conquest ones that you called out?</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Well, I mean, I guess the one thing I would point out, James, is the $700 million that we're going essentially Doug talked about, that we're giving up is business where we have a negative on in total, a slightly negative ROS on. So from an air pocket standpoint, when it goes out, there's not really a it's not like it's just lower profitability, it's actually slightly negative. So getting that business out will be an improvement to our overall EBITDA, not just our margin. As it relates to the new business coming on, it does launch over it's not at one point. There are several programs that are involved. But I would imagine you should model out this all takes place over the next two to three years.</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Yes. With no my interpretation of air pocket is no major void in that time frame, unless something rolls out. It's pretty blended over that time frame.</p><p><strong>James Picariello</strong> -- <em>KeyBanc Capital Markets -- Analyst</em></p><p>Got it. And then maybe just a flavor on an SS&M update. Tying back to the $700 million that you're winding down or exiting, is there what portion of that attributes to SS&M? Is that business still on track to exit that targeted, whatever, $400 million in Tier two business over the next 2.5 years? Or are you seeing more profitable replacement activity still within SS&M? Is that trending maybe better than expected in terms of the renegotiations and new contract wins?</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Yes. Again, maybe I'll try this backwards, and obviously, Jeff can chime in. So as Jeff mentioned, the business is improving. That is a combination of commercial settlements that essentially are now behind us, other than normal course issues that arise across that business versus this backlog of unresolved pricing that we had. I think where we've seen improvement is in faster-than-expected operational improvement, particularly in Europe, but also in North America. So that business is aligned with our original formal statements about that getting to cash flow neutral in the on a run rate, at least, in the '22 time frame. When it comes to loss and replacement, there are metal and mechanism business that are part of the loss, but there's also new business coming on in that area in metals and mechs as well.</p><p>That one has always been for us a customer-related issue. And what we've been moving away from is trying to win metal and mechanism business under these mega programs that are going to go across a number of platforms, a number of regions with a single customer, some of which would be sold to our competitors versus programs where we have an element of vertical integration. And some of our customers still source complete seats and allows us the opportunity to make or buy on the metal and mech. So it's that is easy to talk about it in terms of just product segments. But I would say there's nothing significant in what we're talking about right now that is deviating from our original plan.</p><p>We still plan to scale that business down over time. Revenues may come down a little bit quicker on it as a result of post-COVID volume assumptions versus what we originally had planned. That talks to some of the restructuring activity that we're going to take in that segment. So I think that's covering most of the question. I don't know if there might be a piece I might have left out. Certainly, left...</p><p><strong>James Picariello</strong> -- <em>KeyBanc Capital Markets -- Analyst</em></p><p>That's very helpful. Thanks guys.</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Thank you. The Amanda.</p><p><strong>Operator</strong></p><p>Our last question comes from Joe Spak with RBC Capital Markets. Your line is open.</p><p><strong>Joe Spak</strong> -- <em>RBC Capital Markets -- Analyst</em></p><p>Thanks for squeezing me in here. And Jeff, maybe if we back out sort of what you identified as the COVID cost from this quarter and last quarter, right, you have the adjusted EBITDA down slightly and then the guidance is down slightly again, and I understand there's some maybe unique stuff in the fourth quarter. But can you just help us understand that in the context of sort of the underlying turnaround program? Because at least between the March and June quarter, it seems like you are, with that COVID adjustment, adjusting for the volume differential.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Not sure I totally follow your question. But yes, I would say we are adjusting for the volume differential. And most of the COVID impact we're really talking about here of 400 approximately $400 million in the quarter, $500 million year-to-date is due to significantly lower volume and the pull-through expected that would have been expected from that volume. But help me if I think I missed the nuance.</p><p><strong>Joe Spak</strong> -- <em>RBC Capital Markets -- Analyst</em></p><p>Yes. I guess, like if we just back out the $100 million for the March quarter and the $400 from the June quarter, then EBITDA is still down sequentially, I guess. So what's and I thought there was there's some more underlying traction. So maybe it's some difficulty in sort of separating what you guys are sort of doing underlying from the volume. But I'm curious as to the explanation for why the sort of sequential drop off.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>So OK. The I think it's primarily going to be sales, Joe. So at the end of the day, if you're pulling some more high teens on the revenue, I believe you get you had the $400 million. But there this is also sort of a weird quarter in the sense that it wasn't all just volume, and it's hard to totally articulate what the cost of COVID impact is. We had the plant, especially at the beginning that would run for a little bit. There'd be maybe a COVID case, we'd shut down the plant, we'd clean it, we'd go through the process. We ran things inefficiently in this particular quarter. But I think when you cut through all of that, we are seeing we continue to see positive improvement from the operations. There's a lot of noise that's around COVID. And as you have, I'd say, the abrupt stop and kind of a really spotty restart, especially at the beginning, I think it created a lot of inefficiencies that ran through the numbers that are difficult to quantify and talk about. But maybe it's what it's impacting the analysis you're doing here.</p><p><strong>Joe Spak</strong> -- <em>RBC Capital Markets -- Analyst</em></p><p>Okay. And then just real quick, the actions on slide 10. Can you just can you give us some insight into some of the industry planning that went into that? Because you talked about sort of your customers are planning for lower volumes. And are these actions that are aligned to that or actions that, to be frank, probably could have been done anyway?</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Maybe I'll start on the top on the above plant part, and Doug can jump in on some of the stuff we've been doing more in the operations. But I'd say the above plant stuff, we took a very a significant chunk out of corporate. And I'd say this has been the path we were on. We just used COVID as an opportunity to accelerate a lot of the actions. But we've been on a process here the last couple of years since Doug is going to decentralize the company and put more power in the region, which has served us well. I've also served us well in managing COVID, as a side point. But in taking those moves, we did amp up the speed of them. And then I don't know if Doug you want to cut through the plant...</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Yes. I would I mean, to answer your question, I would say it is if you carve out the actions that we're taking in Europe and set that aside, that is primarily volume-related. And then you look at everything else discussed on the page, you can argue some of it is independent of COVID. This is just us being much more operationally focused, looking for opportunities to consolidate facilities, a lot of what we're trying to communicate there, and it's just a partial list is this whole concept of asset utilization and simple things that we point to about flexing our manufacturing cells in the case of weld cells.</p><p>So that as we bring new programs and we're not reinvesting, we're looking at ways to flex lines. That is something that we greatly improved upon over the last few years. And I think there's still more opportunity there, I would say, that's independent of COVID. That's just the right thing for us to be doing to be more efficient manufacturer. This COVID act as a catalyst for us to dig deeper. Absolutely. So there is an indirect relationship there. So hopefully, that provides a little bit more color to your question.</p><p><strong>Mark Oswald</strong> -- <em>Vice President-Investor Relations And Corporate Communications</em></p><p>Thanks, Joe. Amanda, it looks like we're at the bottom of the hour. So this will conclude the call for today. I know there was a couple of questions that we did not get to. Please feel free to reach out to myself. I'm available for follow-up questions. And again, thank you very much for participating in the call this morning.</p><p><strong>Joe Spak</strong> -- <em>RBC Capital Markets -- Analyst</em></p><p>Thanks. That.</p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p>Thanks, everyone.</p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p>Thanks, everyone.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 64 minutes</strong></p><h2>Call participants:</h2><p><strong>Mark Oswald</strong> -- <em>Vice President-Investor Relations And Corporate Communications</em></p><p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p><p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p><p><strong>Jason Stuhldreher</strong> -- <em>Barclays -- Analyst</em></p><p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p><p><strong>Rod Lache</strong> -- <em>Wolfe Research -- Analyst</em></p><p><strong>James Picariello</strong> -- <em>KeyBanc Capital Markets -- Analyst</em></p><p><strong>Joe Spak</strong> -- <em>RBC Capital Markets -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/adnt">More ADNT analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Adient plc</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAdient%2520plc%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=73756819-1b79-415e-a45b-5b614192a094">ten best stocks</a></strong> for investors to buy right now… and Adient plc wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DAdient%2520plc%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=73756819-1b79-415e-a45b-5b614192a094" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool recommends Adient. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool recommends Adient. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-15934", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["ADNT"], "primary_tickers_companies": ["Adient plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adient plc (ADNT) Q3 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 96, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-15934"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-15934", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["ADNT"], "primary_tickers_companies": ["Adient plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adient plc (ADNT) Q3 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 96, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ADNT earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Adient plc</strong> <span class="ticker" data-id="338729">(<a href="https://www.fool.com/quote/nyse/adient-plc/adnt/">NYSE:ADNT</a>)</span><br/>Q3 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:30 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Welcome to Adient's Third Quarter Financial Results Call. [Operator Instructions]</p>, <p>I would now like to turn the call over to Mark Oswald. Thank you. You may begin.</p>, <p><strong>Mark Oswald</strong> -- <em>Vice President-Investor Relations And Corporate Communications</em></p>, <p>Thank you, Amanda. Good morning, and thank you for joining us as we review Adient's results for the third quarter of fiscal year 2020. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q3 results and outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements.</p>, <p>These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements. Please refer to slide two of our presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments.</p>, <p>I'll now turn the call over to Doug. Doug?</p>, <p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p>, <p>Thanks, Mark. Good morning. Thanks to our investors, prospective investors and analysts joining the call this morning, spending time with us as we review our third quarter results. I hope you and your families are staying safe and healthy in these difficult times. Turning to slide four. Let me begin with a few comments related to our turnaround plan. First off, the team remains laser-focused on the plant while navigating through the global pandemic. We continue to implement actions to ensure the plan progresses in a positive direction. When looking at our results, you'll see operational improvements are driving down waste inefficiencies. The financial slides within Jeff's section illustrates how our improved business performance partially offset the significant COVID bid headwinds. The team is exercising commercial discipline, resulting in new business wins with a higher return on capital versus outgoing programs. I'll expand on this point in a few minutes.</p>, <p>Our launch performance continues to make significant strides with and extremely important as we head into critical launch quarter. We're proactively executing measures to take out structural costs to ensure the cost base is aligned with our expected smaller industry. And finally, we're moving closer to closing the two previously announced strategic transactions. The approximate $500 million of our cash proceeds will strengthen our balance sheet and help drive our total liquidity position higher exiting fiscal 2020. Essentially, we have our hands on the wheel and continue to drive initiatives that are within our control. That said, turning to slide five, our third quarter results were significantly impacted by COVID, where you saw industry production essentially at 0 across Europe and Americas in April and slowly resumed operations in May and June. We've highlighted a few of Adient's headline financials since Adient's financial performance is highly dependent and correlated to vehicle production.</p>, <p>Our results mirrored the overall industry, essentially 0 sales in April, with steadily improvement into May and June. Sales at $1.6 billion were down about $2.6 billion or 60% on a year-over-year basis. I mentioned sales were essentially 0 in April. The exit rate for the quarter was about 75%, the pre-COVID levels for both EMEA and the Americas. Adjusted EBITDA was a loss of $122 million, driven by the significant reduction in sales. We estimated the impact of COVID around $400 million for the quarter. The team did a very good job flexing costs, unfortunately, the capital intensity of our business makes it difficult to offset fixed costs in the environment we were managing through. As production ramped up throughout the quarter, our earnings and margins progressed in a positive direction. With regard to cash, we ended the quarter with just over $1 billion of cash on hand and $1.2 billion of total liquidity. Important to note, cash was significantly impacted by approximately $500 million temporary level trade working capital headwinds resulting from the restart of our operations across Europe and the Americas.</p>, <p>We expect that a majority of these headwinds will reverse as we move through Q4. As far as the $1.2 billion of liquidity, we expect that we will be at a quarterly low point. In fact, total liquidity is expected to exceed $2 billion by the end of September, before factoring any potential debt repayment as a combination of additional JV dividends, proceeds from our previously announced strategic transactions and the reversal of working capital headwinds mentioned earlier will help drive Adient's total liquidity higher. One other point worth calling out. The value of Adient's strategic joint venture network was highlighted in Q3 as the company collected approximately $240 million in cash dividends in the quarter. Year-to-date, the JV has contributed around $250 million with an additional $30 million expected in Q4. Turning to slide six. Let me spend a few minutes discussing the current state of Adient's operation and restart status, first in the APAC region. In China, the market continues to provide encouraging data points. Adient's China operations have returned to pre-COVID levels, in fact, more than 50% of our plants are running two shifts. China auto sales year-over-year volume continues to grow and improve sequentially.</p>, <p>Adient's performance has outpaced the market, driven by our favorable customer and platform exposure as premium OEMs and Japanese OEMs have performed extremely well during 2020. Outside of China, certain Asian countries are showing early signs of market recovery. We expect that trend to continue in the coming months. In Europe, the market is recovering, but at a slower pace compared to recoveries in China and the Americas. Potentially all of Adient's operations have really started with the exception of the small JIT facility in the U.K. operations revamp. Production. Adient sales improved month-over-month in Q3, essentially 0 in April to about 75% of pre-COVID levels in the quarter. Based on current customer release schedules, we expect that rate to continue to improve as we move throughout the fourth quarter. Important to note, given production has not fully returned to pre-COVID levels, Adient continues to flex cost structure utilizing furloughs and short-time work as appropriate. We recognize the benefits associated with these programs will lessen over time and have taken proactive measures to address our structural costs in the region.</p>, <p>More on that in a minute. In the America, all of the Adient's and JV plants have restarted production, similar to Europe. Adient sales have improved sequentially as Q3 progressed and exited the quarter at about 75% of pre-COVID levels. Customer releases for trucks and SUVs are running extremely strong. In some instances, production for certain platforms have returned to pre-COVID levels. While this is an encouraging sign, we remain cautious as rising COVID levels in Southern U.S. and Mexico and restrictive rules in the Chihuahua region in Mexico at risk to the production environment. Turning to slide seven and shifting gears. Let me address a common question related to new and existing business awards that continue to bubble up when meeting with our investor base. Specifically, are we losing business to our competitors? Simple answer, our focus on capital allocation and return on capital is driving profitable business awards, both new and incumbent business. We've studied and reviewed Adient's profitability by customer, by platform, by plant, basically slicing and dicing the data.</p>, <p>What's clear is that certain businesses and platforms have consistently failed to earn an appropriate return. The team is focused on ensuring an adequate return is realized over the platform life is a key driver in determining which platforms we keep and which platforms we're comfortable walking away from. Over the past 12 months, we've successfully replaced approximately $700 million in consolidated revenue incumbent business with a negative return profile with new business awards, including conquest business with significantly better returns. You can see a few examples on the right-hand side of the slide. In addition, our solid execution and value-add initiatives are driving additional opportunities to quote and win profitable new business. We're excited about Adient's book of business that we'll be launching in the coming years. It's an important component of enhancing our margin profile. Speaking of launches, and turning to slide eight, we've highlighted several critical launches, including the Ford F-150, Adient's second largest platform by revenue. Over the past several quarters, launch management has been a specific focus area, helping to drive Adient's improved operational and financial results.</p>, <p>Adhering to a robust process around change management, enhanced readiness and program reviews and early escalation of potential issues made a significant impact. Over the past several quarters, we've called out several platforms, including the Cadillac CT5, Chevy Onix, Toyota Corolla, Nissan Leaf, for achieving flawless launch scores, which we define as 0, 0, 100, 100, 90, which breaks down to 0 safety incidents, 0 customer rejects, 100% on-time delivery, 100% achievement of financial targets, within 90 days from the start of production. We're not here to declare victory today, rather, we mention these examples as evidence of the team's hard work and preparedness for the upcoming launches. Turning to slides nine and 10. Let me conclude my comments with an update and the actions that are being taken to execute and position Adient for long-term success. As we discussed in our Q2 earnings and in subsequent investor meetings, Adient took quick and decisive actions to help mitigate the impact of steep production declines experienced across Europe and the Americas as a result of the pandemic.</p>, <p>Many of these actions, such as furloughing our direct and indirect employees at the plant, enacting salary reductions and salary deferrals above plant, suspending 401k, just to name a few, were temporary in nature. As Adient operations restarted and production increased in Q3, the benefits associated with these measures were reversed. Addressing the company's cost base with structural, more permanent measures is essential as we look to create stronger, more profitable business, especially given Adient's expectation of a smaller industry next year versus fiscal year 2019 and the company's extreme focus on capital allocation and return on capital. The rightsizing actions identified and are being executed include the above measures above plant measures within our operations. The goal is simple, reduce Adient's breakeven point, be free cash flow breakeven or better in fiscal year 2021, even though vehicle production is forecasted to be below pre-COVID levels. We have a lot of work ahead of us to achieve that target, but we're well on our way.</p>, <p>And in fact, we've identified and are in the process of executing cost reductions between $75 million and $100 million versus 2019 in our central functions and regions. slide 10, we've provided a few examples of these actions that have been announced. I won't read through the actions. But as you can see, the measures are far reaching, impacting above plants and joint venture operations. Certain of the actions identified can be executed rather quickly, such as force reductions that impacted our Americas regions and central functions in late May or actions implemented in Asia earlier this year. Other measures have a much longer lead time, such as significant reduction in personnel planned in Europe. As noted in the middle of the slide, in July, we began negotiations with the works council in Germany to execute force reductions impacting approximately 500 engineering and above plant personnel. The reductions are estimated to result in annual labor savings of about $40 million. It's important to note, a portion of the saving relates to flexing of the cost baselines, in other words, the prevention in margin degradation.</p>, <p>Given certain of the actions will be implemented in fiscal 2021, we only achieve a partial benefit next year. Full run rate savings are expected for fiscal year '22. Given the size and magnitude of the measures being implemented, we do expect to have an elevated level of restructuring costs running through our financials in the coming quarters. The team is currently finalizing our fiscal 2021 plan. Once completed, we'll be able to provide you an estimate of the size and timing of the charges and the cash outlays associated with these measures. In the end, significantly lower cost base, combined with continued operational improvement and a strengthening platform portfolio is expected to result in a stronger, more profitable business, essentially further positioning Adient for long-term success.</p>, <p>With that, I'll turn the call over to Jeff, so he can take us through Adient's financial performance for the quarter.</p>, <p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p>, <p>Thanks, Doug. Good morning, everyone. And Doug, I echo your earlier comments and hope everyone is safe and well. Starting on slide 12 and adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side of the page. We will focus our commentary on the adjusted results, which excludes special items that we view as either onetime in nature or otherwise skew important trends in the underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to restructuring costs, asset impairments and purchase accounting amortization. Details of these adjustments are in the appendix of the presentation. Sales were $1.6 billion for the quarter, down about 60% year-over-year, which, as Doug noted, was driven by production stoppages at our customers across Europe and the Americas. Adjusted EBITDA for the quarter was a loss of $122 million. By applying our projected margin on lost sales and netted netting out our various short-term austerity actions, we estimate that COVID cost us approximately $400 million in the quarter.</p>, <p>However, and as we'll discuss more in a moment, Adient's operations across Europe and America continued to experience improved business performance. With regard to equity income, Q3 fiscal 2019 included $15 million of income related to our interiors business that is no longer part of our consolidation today. Therefore, on an apples-to-apples comparison, Adient's Seating equity income was up $8 million or 15% year-over-year, a very good performance as a result of our China operations continuing to capitalize in the improving China markets. Finally, adjusted net income and EPS were down significantly year-over-year, a loss of $261 million and $2.78 per share, respectively. I'll also point out that our tax expense of $14 million in the quarter contributed to our net loss. For those of you wondering why Adient did not recognize the tax benefit in the current quarter associated with their losses, if you recall, during 2018 and 2019 fiscal years, Adient recorded valuation allowances against the deferred tax assets of many entities located in significant jurisdictions in which it operates, including the United States, Germany, Mexico, the United Kingdom, among others.</p>, <p>No tax benefits are recognized for losses by entities with valuation allowances, and therefore, tax benefits were not recognized during Q3 by many entities that incurred losses. One last comment on taxes. Similar to Q2 of this year, Adient's third quarter effective tax rate was based on an actual tax rate calculation versus an estimated annual effective tax rate calculation. The continued use of this methodology was necessary due to the uncertainty of the pandemic. Now let's break down our third quarter results in more detail, starting with revenue on slide 13. We reported consolidated sales of $1.6 billion, a year a decrease of almost $2.6 billion compared to the same period a year ago. Lower volume across North America, Europe and Asia was the primary driver of the year-over-year decrease, again, attributed to lost production volume associated with the pandemic.</p>, <p>In addition, negative impact of currency movements between the two periods impacted the quarter by roughly $100 million. The biggest driver included the Brazilian real, the Czech koruna and the euro. Worth noting on the call out box on the right, consolidated sales in both Europe and Americas were down substantially at the beginning of the quarter, almost 100% for the Americas in April. Both markets improved month-on-month as the quarter progressed, exiting the quarter at between 75% to 80% of pre-COVID levels. In China, Adient sales were strong exiting the quarter, driven by our favorable customer and platform mix. For markets outside of China and Asia, sales began to improve as production volumes returned, but were materially impacted by the pandemic, similar to what we saw in America and Europe. For each of the markets, Adient's sales were in line or better compared to production within the markets. With regard to Adient's unconsolidated Seating revenue, year-over-year results were relatively flat. However, as you peel back the onion, the results varied significantly between unconsolidated sales in China versus unconsolidated sales outside of China.</p>, <p>In China, driven primarily through our strategic JV network, sales were up 14% year-over-year, excluding FX. The sales performance versus the market is attributable to Adient's strong mix of business, specifically our exposure to luxury and Japanese OEMs. Outside of China, Adient has a variety of unconsolidated JVs. These operations were impacted by the same production stoppages that affected Adient consolidated results. On average, the unconsolidated sales of these JVs were down approximately 60% plus in the most recent quarter. We are encouraged we were encouraged with the sales trend. It's that's positively progressing, again, similar to what we're seeing with our consolidated sales. Moving to slide 14. We've provided a bridge of adjusted EBITDA to show our performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was a loss of $122 million in the quarter versus $205 million last year.</p>, <p>The impact of significantly lower volumes across Americas, Europe and Asia was the primary driver of the steep year-over-year decline. In addition, and to a much lesser extent, the planned divestiture of YFAI also had a negative impact on the year-over-year comparison as we stopped recording its income last December. Since Adient's financial performance is highly dependent on and correlated to vehicle production, adjusted EBITDA showed steady improvement month-on-month as we moved through the third quarter. In fact, after a horrible April and start to May, our June adjusted EBITDA results were about equal to June 2019 despite sales being down approximately 25% year-over-year. Speaking of monthly results, just one more data point. Excluding in April and May, Adient's margins have improved year-over-year every month through September 2019. Back on the quarter, and as Doug alluded to earlier, partially offsetting the significant volume reduction was improved business performance and lower SG&A costs. Labor and overhead performance, a reduction in SG&A costs, lower ops waste launch and tooling costs were the primary drivers.</p>, <p>The approximate $45 million reduction in SG&A costs were primarily concentrated between EMEA and Americas and included increased efficiencies and positive benefits associated with the deconsolidation of Adient Aerospace and the divestiture of RECARO. But It's also important to point out, a portion of the improvement, call it, about $20 million, related to temporary benefits associated with employee compensation that are not likely to repeat next year. This temporary benefit was included in the net COVID impact of approximately $400 million. Business improvement, combined with labor and overhead efficiencies and lower SG&A, helped to contain our decremental margins to the mid-teens, call it, 16%, even as certain of the temporary cost reductions began to reverse. For example, the benefit associated with furloughing our direct and indirect plant personnel. This outcome was in line with internal expectations. And if you recall, we mentioned on the Q2 earnings call, the 13% decremental margin experienced in the second quarter would trend higher as Adient's operations restarted but would be contained below the 18% decrementals we typically expect.</p>, <p>To ensure enough time is allocated to the Q&A portion of the call, we've provided our detailed segment performance slides in the appendix of the presentation. Improved business performance and lower SG&A costs, partially offset by the impact of lower volumes more than offset by the impact of lower volumes is the primary takeaway from the Americas and EMEA region. In Asia, a $15 million improvement in our Seating equity income offset the YFAI equity income from last year, but overall performance was driven by lower volumes and earnings outside of China. Let me now shift to our cash, liquidity and capital structure on slides 15 and 16. For the quarter, adjusted free cash flow, defined as operating cash flow less Capex, was an outflow of $528 million. There were several factors that had a significant impact in the quarter's cash compared to our Q2 ending balance. Excluding Adient's ABL, these factors included, at a high level, lost production. Given sales were down roughly 60%, COVID essentially cost us about two months of production in the quarter.</p>, <p>We stated heading into the quarter, every month of shutdown cost us approximately $175 million of cash. Therefore, loss production resulted in a burn of roughly $350 million, again, at a very high level. Also a temporary net trade working capital headwind of approximately $530 million heavily impacted Q3. This working capital outcome was expected with the sudden shutdown and subsequent restart of our operations. Q3 working capital headwind is expected to unwind in Q4 and benefit the quarter by approximately $400 million as noted on the right-hand side of the page. For full transparency, I'd also remind everyone in our that in our second quarter, working capital provided an approximate $100 million benefit to cash flow when production immediately ceased, reinforcing Adient's working capital movements tend to smooth out over a period of time. Moving on. Partially offsetting the approximate $880 million of headwinds just mentioned was just over $240 million of dividends received from our China JVs in the quarter. This, of course, was a very good outcome and highlights the value of our strategic joint venture network.</p>, <p>In fact, for the full year, the dividends expected from China will be $70 million to $80 million higher versus our earlier estimates. In addition to the China dividends, a handful of other positive benefits aided the quarter, such as deferring certain tax payments and VAT-related items, call those benefits around $70 million. Although executing these actions throughout the year enhanced our liquidity and helped us weather the storm, these $70 million of deferrals will need to be paid next year. At the very bottom of the page, you can see we ended the quarter at about $1.2 billion of total liquidity, which included our cash on hand of $1.32 billion, plus $155 million drawn of undrawn capacity under our revolving line of credit. Looking forward, we believe Q3 represented our quarterly low point of liquidity and would expect liquidity to exceed $2 billion by the end of September before factoring in any potential debt repayment. Key drivers would include cash proceeds expected from previously announced transactions, call it, $500 million; additional China JV dividend of about $30 million; the reversal of temporary working capital headwinds; and increased capacity under our revolver.</p>, <p>On slide 16, in addition to showing our debt and net debt position, which totaled $4.5 billion and $3.5 billion, respectively, at June 30, we've also provided a snapshot of Adient's capital structure. Just a few comments here. We believe this capital structure not only provides flexibility to weather the storm, it provides flexibility to pay down debt after we cycle past the crisis. Subsequent to the quarter close, Adient proactively repaid $179 million drawn previously drawn on the revolver. I'd also note that capacity under the revolver is based on a one-month lag such that Q3 availability was based on May AR and inventory balances. Updating the AR and inventory balances to the end of June increased our revolver availability to approximately $650 million in July or a bit more than $300 million that reported at the end of Q3. Improving Adient's cash generation remains a top priority. As Doug pointed out, the actions Adient has taken and plans to take are designed to improve our earnings and cash flow to be profitable in a smaller sales environment. Once the crisis is in the rearview mirror, we'd look to pay down various excess debt obligations.</p>, <p>Over time, post crisis, we'd expect to have 0 outstanding balance in the revolver and run with a cash balance somewhere in the $500 million to $600 million range. Finally, a few closing remarks on slide 17. First, we expect the global economic impact of COVID-19 will continue to influence the auto industry and Adient for quite some time. That said, we're encouraged by the green shoots that emerged as we progressed through Q3. Building on the positive trend in vehicle production established in our third quarter, Adient expects vehicle production across Europe and America to continue to improve sequentially in the coming months. Since Adient's financial results are highly dependent on and correlated to vehicle production and based on the environment today, we expect Adient's sales, earnings and margin performance will also trend higher in the coming months. Specifically, we expect Q4 sales to be in the range of $3.3 billion to $3.5 billion. Although this implies a 13% decline versus Q4 last year, at the midpoint, it's important to remember our sales in North America will be impacted by the launch of the F-150.</p>, <p>Adjusted EBITDA for Q4 is expected to range between $180 million and $200 million. At the midpoint, this would be down versus last year's Q4, but significantly less down than would otherwise be implied by the expected decline in volume. Just to comment on our full year adjusted EBITDA, which is not shown, but I'm assuming you'll do the math, it would settle in around $580 million range at the midpoint of Q4's guide. And as you know, it includes an approximate $500 million impact from COVID. I know many of you will be tempted to take the $1.08 billion and use that as your starting point for fiscal 2021, unfortunately, it's not that simple. The biggest factor being production volumes, which, heading into our fiscal 2021, are very uncertain. More likely than not, we expect volumes to be lower than our COVID-adjusted numbers for 2019. In addition, our portfolio moves, such as the sale of RECARO and the expected sale of fabrics and YFAI, will impact the year-over-year walk into 2021.</p>, <p>The team is presently finalizing our fiscal 2021 plan, which we plan to share with you later this calendar year. Moving on and back to Q4. Within adjusted EBITDA, equity income will settle in the $50 million to $60 million range, in line with last year after backing out YFAI equity income of $14 million. Based on our customer launch plans, we expect Capex to be about $100 million. And finally, for free cash flow, we'd expect Q4 to be in the range of $300 million to $400 million.</p>, <p>With that, let's move to the question-and-answer portion of the call. Operator, we'll have our first question.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-43996">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-43996');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Our first question comes from Brian Johnson with Barclays. Your line is open.</p>, <p><strong>Jason Stuhldreher</strong> -- <em>Barclays -- Analyst</em></p>, <p>Hi team, This is Jason Stuhldreher on for Brian. I appreciate the color today. I wanted to just first start on the Q4 outlook and specifically on the production side of things. I think some other suppliers are taking a more conservative stance around Q4. It looks like the production assumptions you lined out are more or less in line with third-party estimates. And so I was wondering if you could just comment on your level of confidence around those Q4 numbers. Are the schedules you're seeing in the first month here kind of validating those Q4 forecasts that others are putting out?</p>, <p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p>, <p>Yes. I'll start out, and I'll let Jeff provide additional comments. To answer your question directly, yes, the schedules that we have in front of us are pretty consistent with what we are anticipating in Q4. As everyone understands inventory levels for our customers are down, they're trying to replenish the dealers right now. There is a strong desire for our customers to run at peak output, particularly in our key models. And certainly, we value the mix that we have. I would say the only note of caution that I would have is, as we mentioned in our formal remarks, there's still some volatility, if you will, in the volume in that from time to time, our customers are experiencing directly, indirectly COVID-related disruptions in the supply chain, not caused by Adient but caused by other suppliers. So that's a potential risk that's out there. Certainly, demand is not the risk that we see.</p>, <p><strong>Jason Stuhldreher</strong> -- <em>Barclays -- Analyst</em></p>, <p>Understood. Okay. And then second question, maybe a little more medium-term focused. As we look at the operational improvements that you've been able to do year-to-date, if I recall, coming into the year, you're looking at maybe around $200 million or so of performance improvements in 2020, and then you were actually ahead of that in Q1 before the shutdown started happening in China. And I guess, as we look at what you've done year-to-date, it looks to be more in like the $300 million range of performance at the plat and program level. And so just kind of curious here, as we look over the next several quarters or even a year or so, at what point do the comps start to become more difficult to extract performance? And I guess I'm wondering, has the COVID issue, has that allowed you to bring forward some of these performance initiatives? And I guess, just how much more runway is there as we look over the next four to five quarters?</p>, <p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p>, <p>I'd kind of break the question into two pieces. Certainly, a lot of the performance improvements we expected were in the, I'll say, commercial and operational improvement of the existing business. There was another element, as we improve launch performance, which we have, that would continue to improve our overall performance. The other element that we touched on is ultimately exiting business that was not performing up to our level of, I'll say, tolerance and then bringing on new business that would bring that next wave of operational improvement. So I think there's ample opportunity for us to continue to go down that path. I think COVID kind of suspending that for a period of time as we focused on liquidity. We've taken new actions that we have to put into the equation with anticipated a down market that probably wasn't originally envisioned when we started to articulate a turnaround plan. With regard to, is the environment right, I would say the environment is certainly right for our customers to look at cost reductions. If you just look at it from their perspective, they still are making huge investments, particularly in electrification.</p>, <p>That was a daunting task. They still have the risk of fines in Europe if they don't meet environmental standards. That was a daunting task before COVID. So COVID in a down market hasn't improved that environment. I know, in fact, in talking with them, it's only increased their appetite to find ways to reduce costs. And when they want to find ways to reduce costs, that creates an opportunity for us. So I'm cautiously optimistic we can continue on our path and maybe even find, as we've mentioned in previous calls, incremental opportunity as customers maybe look to hold on the platform longer, delay launches or engineering and capital investment in program replenishment.</p>, <p><strong>Jason Stuhldreher</strong> -- <em>Barclays -- Analyst</em></p>, <p>Okay, thank you very much.</p>, <p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p>, <p>Well, thank you.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Our next question comes from John Murphy with Bank of America. Your line is open.</p>, <p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Good morning, guys. Doug, maybe if I could just follow up on that last question and sort of your discussion there. I mean as you look at this, obviously, as you're going through a rationalization of the business, this kind of disruption is can delay things. I'm just curious, in the context of what you're doing right now, are there any net new cost saves or business processes that going forward as the world normalizes might benefit you above and beyond what you were trying to execute before?</p>, <p><strong>Doug Del Grosso</strong> -- <em>President And Chief Executive Officer</em></p>, <p>So first of all, John, I would say, kind of to the point I was trying to make before, maybe I can reemphasize it. Prior to COVID, I think business was somewhat as normal. And our customers were focused on new launch. They, I think, weren't particularly interested in cost reduction initiatives. Some were, some historically always have been, others were, I'll say, perhaps distracted. I think what COVID did was create an inflection point for them to recalibrate. And when they recalibrated against a down market for the foreseeable coming years, I think they recognized that they really needed to intensify their efforts there.</p>, <p>Fortunately for us, and we've spent probably the last nine to 12 months anticipating that, certainly not envisioning what COVID might. But to my earlier point that there was going to be a real need for them due to their investments in, whether it was electrification or autonomous vehicles or meeting environmental standards, that maybe they didn't completely appreciate. And I think COVID's been a catalyst for them to say, "Look, we really need to reach out." And this isn't just speculation on my part, this is direct conversations with our customers. I wouldn't say every single customer has come to that conclusion.</p>, <p>But I think what we found is we've exposed them to the work that we're doing in that area, and it's some pretty impressive work. I mean to say it's VA/VE is just a complete understatement. It's what we call it only because we haven't come up with a better name. But it's really focused on this concept of return on capital investment, how to get scale with a customer without putting in brand-new investment, how to do that quickly. There's a tremendous amount of technology on the shelf right now in the area seating that does not need to be reinvented that can be applied to more than meet or exceed consumer expectations. And it's really directing the customer to say, "Look, you should come and take a look at this on your next-generation program." We've talked a little bit about one program we did that with one customer that just launched an electric vehicle, was going to introduce a next generation of an existing platform that's historically been internal combustion.</p>, <p>And we said, "Why don't you just take this new architecture and seating systems that you're just launching on electric vehicle and apply it to this next-generation product." And in theory, theoretically, that requires 0 engineering work on your part, 0 capital investment on our part or minimal of us as we just leverage incremental volume off that and arguably minimal capital investment. That's becoming a much more appealing story to our customers, and I would expect that's going to continue.</p>, <p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Okay. That's helpful. And then just a second question on the mix benefit in the quarter. And Jeff, on slide 14, you went through the walk, and volume and mix was a headwind of $438 million on EBITDA. I'm just curious, if you were to split that between volume and mix, I mean, how much of a benefit was mix in the quarter? And how sustainable do you at least see that in the near-term schedules are expected to be over time?</p>, <p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p>, <p>Yes. Good question, John. The I would say the most of what you're seeing there is just pure volume impact. Mix wasn't a huge portion of that $438 million. As it relates to the mix for our fourth quarter, it's probably a little bit down just given the or unfavorable for us just given the launch of the F-150 and how production will go on that. But I'd say for the quarter, I'd take that $438 million as base. For the vast majority for your modeling purposes, I'd call it volume.</p>, <p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Okay. That's helpful. And then if you could just, I don't know, illustrate or elucidate where you think 2021 will land in the context of you talking about trying to get to breakeven free cash flow in FY 2021? What is sort of the thought process or the business environment that you're fighting to get to that level in?</p>, <p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p>, <p>Well, I'd say that there's a lot of components to that and some of them are still being worked as we complete our 2021 plan, John. But as we look through a couple of dynamics here, we've taken a big chunk out of our cost structure with the activities as we've decentralized the company. And those benefits, some have hit this year, but we'll have a full year run rate in 2021. That's going to be a big piece. I think there's going to be opportunities on Capex where we won't be spending at the historical levels. The SS&M business, that's becoming a the improvement level in that business is significant. With a business that had cost us on a simplified free cash flow to, call it, $450 million in 2018-2019 time frame, it's probably half of that, a little bit, give or take, this year. And we'll end next year close to breakeven or we expect it to be really breakeven by the end. Those are going to be big components of the free cash flow story for us next year. But there's some more work to do for us. It's also the continuation of the improvements that you've seen, Doug talked about.</p>, <p>We're seeing, I'd say, from a program perspective, as I sit through, especially big program reviews, the team, not only they commanded of the data better, the all of it's coming through with better return profiles than what we're seeing in a lot of these key programs. So those are all key components, but I'd say we're pretty optimistic about it. The big challenge for us next year, quite frankly, is going to be Europe in general. There is depending on where the market turns up for next year. We talked about it. Doug talked about it a little bit earlier. But the European market is expected to be down. To restructure to take out cost in Europe is expensive. And so I would expect that in dealing with next year, we are going to have some elevated restructuring costs in Europe.</p>, <p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Great. And just one last housekeeping. What's minimum liquidity and cash that you're looking for, Jeff?</p>, <p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p>, <p>Yes. I'd say we like to see cash, give or take, around the $500 million to $600 million mark. And we're going to have, in a healthy time period, around $1 billion on the ABL, and we would expect that to be undrawn. So give or take, $1.5 million or so on a normalized basis. And we expect quite a bit over that as we end the year with the transactions, the working capital swing back and just the ABL kind of rebuilding the asset base, primarily from accounts receivable.</p>, <p><strong>John Murphy</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Yeah. Thank you very much.</p>, <p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p>, <p>Thanks, John.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open.</p>, <p><strong>Rod Lache</strong> -- <em>Wolfe Research -- Analyst</em></p>, <p>Good morning, everybody. I wanted to ask just two questions. One is trying to think about what your Q4 guidance implies for prospective EBITDA run rate. So ex equity income, if you use the midpoint, your guidance is about $135 million or $540 million annualized. Can you just remind us, what is the seasonality of that? Are there settlements that typically come in, in your September quarter? Maybe some rough estimate of what the F-150 impact is. And as we extrapolate and think about next year, the $75 million to $100 million of savings, is that a net number? Or should we think about nonrecurrence of some of the austerity measures this year maybe subtracting from that?</p>, <p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p>, <p>Yes. I guess I'll work backwards a bit, Rod. But the $75 million to $100 million is a net number. You can we expected that's not necessarily from our Q4 cost base, although there'll be incrementals to that, too. But from pre-COVID level cost base, we see that as that's what we've been targeting to take out of the business. Some of those costs are going to take the time period for Europe, which is going to be a significant portion of those cost reductions, just with the environment on doing restructuring in Europe, takes some time to enact. So I would expect a lot of those savings won't start to run rate until second or third fiscal quarter for us next year. Some have already started to occur, though, today, so it's a bit of a mix. As it relates to the fourth quarter, it is a this is a pretty uncertain time, I'll be honest, and we opted to put guidance in here.</p>, <p>And as we look to 2021, I would say you can't necessarily use our Q4 as a guide post for it. The F-150 is a big impact for us in the quarter. We do expect production essentially to switch over in September, and that's going to bring down the old line. And as we start the new with launch cost and have essentially dwindling production on the old, all that will have a big impact on sales and profitability in our Q4. So I'd say more to come, Rod. We'll give you more color on our on our fiscal 2021 plan on our next earnings call. But I would just say the fourth quarter is probably going to be an under guide for you on doing the math.</p>, <p><strong>Rod Lache</strong> -- <em>Wolfe Research -- Analyst</em></p>, <p>Okay. Is there a seasonality to settlements or something like that, that we need to keep in mind or no?</p>, <p><strong>Jeff Stafeil</strong> -- <em>Executive Vice President And Chief Financial Officer</em></p>, <p>I'd say most of them sort of happen through the year. But if there's a seasonal point to it, it tends to be in our first quarter, the calendar year-end quarter.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool recommends Adient. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-15934", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["ADNT"], "primary_tickers_companies": ["Adient plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adient plc (ADNT) Q3 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 96, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-15934"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-15934", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-industrials", "tickers": "[\"\"]", "primary_tickers": ["ADNT"], "primary_tickers_companies": ["Adient plc"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Adient plc (ADNT) Q3 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 96, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ADNT earnings call for the period ending June 30, 2020. | I would now like to turn the call over to Mark Oswald. Thank you. You may begin.\n Thank you, Amanda. Good morning, and thank you for joining us as we review Adient's results for the third quarter of fiscal year 2020. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q3 results and outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements.\n These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements. Please refer to slide two of our presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments.\n I'll now turn the call over to Doug. Doug?\n Thanks, Mark. Good morning. Thanks to our investors, prospective investors and analysts joining the call this morning, spending time with us as we review our third quarter results. I hope you and your families are staying safe and healthy in these difficult times. Turning to slide four. Let me begin with a few comments related to our turnaround plan. First off, the team remains laser-focused on the plant while navigating through the global pandemic. We continue to implement actions to ensure the plan progresses in a positive direction. When looking at our results, you'll see operational improvements are driving down waste inefficiencies. The financial slides within Jeff's section illustrates how our improved business performance partially offset the significant COVID bid headwinds. The team is exercising commercial discipline, resulting in new business wins with a higher return on capital versus outgoing programs. I'll expand on this point in a few minutes.\n Our launch performance continues to make significant strides with and extremely important as we head into critical launch quarter. We're proactively executing measures to take out structural costs to ensure the cost base is aligned with our expected smaller industry. And finally, we're moving closer to closing the two previously announced strategic transactions. The approximate $500 million of our cash proceeds will strengthen our balance sheet and help drive our total liquidity position higher exiting fiscal 2020. Essentially, we have our hands on the wheel and continue to drive initiatives that are within our control. That said, turning to slide five, our third quarter results were significantly impacted by COVID, where you saw industry production essentially at 0 across Europe and Americas in April and slowly resumed operations in May and June. We've highlighted a few of Adient's headline financials since Adient's financial performance is highly dependent and correlated to vehicle production.\n Our results mirrored the overall industry, essentially 0 sales in April, with steadily improvement into May and June. Sales at $1.6 billion were down about $2.6 billion or 60% on a year-over-year basis. I mentioned sales were essentially 0 in April. The exit rate for the quarter was about 75%, the pre-COVID levels for both EMEA and the Americas. Adjusted EBITDA was a loss of $122 million, driven by the significant reduction in sales. We estimated the impact of COVID around $400 million for the quarter. The team did a very good job flexing costs, unfortunately, the capital intensity of our business makes it difficult to offset fixed costs in the environment we were managing through. As production ramped up throughout the quarter, our earnings and margins progressed in a positive direction. With regard to cash, we ended the quarter with just over $1 billion of cash on hand and $1.2 billion of total liquidity. Important to note, cash was significantly impacted by approximately $500 million temporary level trade working capital headwinds resulting from the restart of our operations across Europe and the Americas.\n We expect that a majority of these headwinds will reverse as we move through Q4. As far as the $1.2 billion of liquidity, we expect that we will be at a quarterly low point. In fact, total liquidity is expected to exceed $2 billion by the end of September, before factoring any potential debt repayment as a combination of additional JV dividends, proceeds from our previously announced strategic transactions and the reversal of working capital headwinds mentioned earlier will help drive Adient's total liquidity higher. One other point worth calling out. The value of Adient's strategic joint venture network was highlighted in Q3 as the company collected approximately $240 million in cash dividends in the quarter. Year-to-date, the JV has contributed around $250 million with an additional $30 million expected in Q4. Turning to slide six. Let me spend a few minutes discussing the current state of Adient's operation and restart status, first in the APAC region. In China, the market continues to provide encouraging data points. Adient's China operations have returned to pre-COVID levels, in fact, more than 50% of our plants are running two shifts. China auto sales year-over-year volume continues to grow and improve sequentially.\n Adient's performance has outpaced the market, driven by our favorable customer and platform exposure as premium OEMs and Japanese OEMs have performed extremely well during 2020. Outside of China, certain Asian countries are showing early signs of market recovery. We expect that trend to continue in the coming months. In Europe, the market is recovering, but at a slower pace compared to recoveries in China and the Americas. Potentially all of Adient's operations have really started with the exception of the small JIT facility in the U.K. operations revamp. Production. Adient sales improved month-over-month in Q3, essentially 0 in April to about 75% of pre-COVID levels in the quarter. Based on current customer release schedules, we expect that rate to continue to improve as we move throughout the fourth quarter. Important to note, given production has not fully returned to pre-COVID levels, Adient continues to flex cost structure utilizing furloughs and short-time work as appropriate. We recognize the benefits associated with these programs will lessen over time and have taken proactive measures to address our structural costs in the region.\n More on that in a minute. In the America, all of the Adient's and JV plants have restarted production, similar to Europe. Adient sales have improved sequentially as Q3 progressed and exited the quarter at about 75% of pre-COVID levels. Customer releases for trucks and SUVs are running extremely strong. In some instances, production for certain platforms have returned to pre-COVID levels. While this is an encouraging sign, we remain cautious as rising COVID levels in Southern U.S. and Mexico and restrictive rules in the Chihuahua region in Mexico at risk to the production environment. Turning to slide seven and shifting gears. Let me address a common question related to new and existing business awards that continue to bubble up when meeting with our investor base. Specifically, are we losing business to our competitors? Simple answer, our focus on capital allocation and return on capital is driving profitable business awards, both new and incumbent business. We've studied and reviewed Adient's profitability by customer, by platform, by plant, basically slicing and dicing the data.\n What's clear is that certain businesses and platforms have consistently failed to earn an appropriate return. The team is focused on ensuring an adequate return is realized over the platform life is a key driver in determining which platforms we keep and which platforms we're comfortable walking away from. Over the past 12 months, we've successfully replaced approximately $700 million in consolidated revenue incumbent business with a negative return profile with new business awards, including conquest business with significantly better returns. You can see a few examples on the right-hand side of the slide. In addition, our solid execution and value-add initiatives are driving additional opportunities to quote and win profitable new business. We're excited about Adient's book of business that we'll be launching in the coming years. It's an important component of enhancing our margin profile. Speaking of launches, and turning to slide eight, we've highlighted several critical launches, including the Ford F-150, Adient's second largest platform by revenue. Over the past several quarters, launch management has been a specific focus area, helping to drive Adient's improved operational and financial results.\n Adhering to a robust process around change management, enhanced readiness and program reviews and early escalation of potential issues made a significant impact. Over the past several quarters, we've called out several platforms, including the Cadillac CT5, Chevy Onix, Toyota Corolla, Nissan Leaf, for achieving flawless launch scores, which we define as 0, 0, 100, 100, 90, which breaks down to 0 safety incidents, 0 customer rejects, 100% on-time delivery, 100% achievement of financial targets, within 90 days from the start of production. We're not here to declare victory today, rather, we mention these examples as evidence of the team's hard work and preparedness for the upcoming launches. Turning to slides nine and 10. Let me conclude my comments with an update and the actions that are being taken to execute and position Adient for long-term success. As we discussed in our Q2 earnings and in subsequent investor meetings, Adient took quick and decisive actions to help mitigate the impact of steep production declines experienced across Europe and the Americas as a result of the pandemic.\n Many of these actions, such as furloughing our direct and indirect employees at the plant, enacting salary reductions and salary deferrals above plant, suspending 401k, just to name a few, were temporary in nature. As Adient operations restarted and production increased in Q3, the benefits associated with these measures were reversed. Addressing the company's cost base with structural, more permanent measures is essential as we look to create stronger, more profitable business, especially given Adient's expectation of a smaller industry next year versus fiscal year 2019 and the company's extreme focus on capital allocation and return on capital. The rightsizing actions identified and are being executed include the above measures above plant measures within our operations. The goal is simple, reduce Adient's breakeven point, be free cash flow breakeven or better in fiscal year 2021, even though vehicle production is forecasted to be below pre-COVID levels. We have a lot of work ahead of us to achieve that target, but we're well on our way.\n And in fact, we've identified and are in the process of executing cost reductions between $75 million and $100 million versus 2019 in our central functions and regions. slide 10, we've provided a few examples of these actions that have been announced. I won't read through the actions. But as you can see, the measures are far reaching, impacting above plants and joint venture operations. Certain of the actions identified can be executed rather quickly, such as force reductions that impacted our Americas regions and central functions in late May or actions implemented in Asia earlier this year. Other measures have a much longer lead time, such as significant reduction in personnel planned in Europe. As noted in the middle of the slide, in July, we began negotiations with the works council in Germany to execute force reductions impacting approximately 500 engineering and above plant personnel. The reductions are estimated to result in annual labor savings of about $40 million. It's important to note, a portion of the saving relates to flexing of the cost baselines, in other words, the prevention in margin degradation.\n Given certain of the actions will be implemented in fiscal 2021, we only achieve a partial benefit next year. Full run rate savings are expected for fiscal year '22. Given the size and magnitude of the measures being implemented, we do expect to have an elevated level of restructuring costs running through our financials in the coming quarters. The team is currently finalizing our fiscal 2021 plan. Once completed, we'll be able to provide you an estimate of the size and timing of the charges and the cash outlays associated with these measures. In the end, significantly lower cost base, combined with continued operational improvement and a strengthening platform portfolio is expected to result in a stronger, more profitable business, essentially further positioning Adient for long-term success.\n With that, I'll turn the call over to Jeff, so he can take us through Adient's financial performance for the quarter.\n Thanks, Doug. Good morning, everyone. And Doug, I echo your earlier comments and hope everyone is safe and well. Starting on slide 12 and adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side of the page. We will focus our commentary on the adjusted results, which excludes special items that we view as either onetime in nature or otherwise skew important trends in the underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to restructuring costs, asset impairments and purchase accounting amortization. Details of these adjustments are in the appendix of the presentation. Sales were $1.6 billion for the quarter, down about 60% year-over-year, which, as Doug noted, was driven by production stoppages at our customers across Europe and the Americas. Adjusted EBITDA for the quarter was a loss of $122 million. By applying our projected margin on lost sales and netted netting out our various short-term austerity actions, we estimate that COVID cost us approximately $400 million in the quarter.\n However, and as we'll discuss more in a moment, Adient's operations across Europe and America continued to experience improved business performance. With regard to equity income, Q3 fiscal 2019 included $15 million of income related to our interiors business that is no longer part of our consolidation today. Therefore, on an apples-to-apples comparison, Adient's Seating equity income was up $8 million or 15% year-over-year, a very good performance as a result of our China operations continuing to capitalize in the improving China markets. Finally, adjusted net income and EPS were down significantly year-over-year, a loss of $261 million and $2.78 per share, respectively. I'll also point out that our tax expense of $14 million in the quarter contributed to our net loss. For those of you wondering why Adient did not recognize the tax benefit in the current quarter associated with their losses, if you recall, during 2018 and 2019 fiscal years, Adient recorded valuation allowances against the deferred tax assets of many entities located in significant jurisdictions in which it operates, including the United States, Germany, Mexico, the United Kingdom, among others.\n No tax benefits are recognized for losses by entities with valuation allowances, and therefore, tax benefits were not recognized during Q3 by many entities that incurred losses. One last comment on taxes. Similar to Q2 of this year, Adient's third quarter effective tax rate was based on an actual tax rate calculation versus an estimated annual effective tax rate calculation. The continued use of this methodology was necessary due to the uncertainty of the pandemic. Now let's break down our third quarter results in more detail, starting with revenue on slide 13. We reported consolidated sales of $1.6 billion, a year a decrease of almost $2.6 billion compared to the same period a year ago. Lower volume across North America, Europe and Asia was the primary driver of the year-over-year decrease, again, attributed to lost production volume associated with the pandemic.\n In addition, negative impact of currency movements between the two periods impacted the quarter by roughly $100 million. The biggest driver included the Brazilian real, the Czech koruna and the euro. Worth noting on the call out box on the right, consolidated sales in both Europe and Americas were down substantially at the beginning of the quarter, almost 100% for the Americas in April. Both markets improved month-on-month as the quarter progressed, exiting the quarter at between 75% to 80% of pre-COVID levels. In China, Adient sales were strong exiting the quarter, driven by our favorable customer and platform mix. For markets outside of China and Asia, sales began to improve as production volumes returned, but were materially impacted by the pandemic, similar to what we saw in America and Europe. For each of the markets, Adient's sales were in line or better compared to production within the markets. With regard to Adient's unconsolidated Seating revenue, year-over-year results were relatively flat. However, as you peel back the onion, the results varied significantly between unconsolidated sales in China versus unconsolidated sales outside of China.\n In China, driven primarily through our strategic JV network, sales were up 14% year-over-year, excluding FX. The sales performance versus the market is attributable to Adient's strong mix of business, specifically our exposure to luxury and Japanese OEMs. Outside of China, Adient has a variety of unconsolidated JVs. These operations were impacted by the same production stoppages that affected Adient consolidated results. On average, the unconsolidated sales of these JVs were down approximately 60% plus in the most recent quarter. We are encouraged we were encouraged with the sales trend. It's that's positively progressing, again, similar to what we're seeing with our consolidated sales. Moving to slide 14. We've provided a bridge of adjusted EBITDA to show our performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was a loss of $122 million in the quarter versus $205 million last year.\n The impact of significantly lower volumes across Americas, Europe and Asia was the primary driver of the steep year-over-year decline. In addition, and to a much lesser extent, the planned divestiture of YFAI also had a negative impact on the year-over-year comparison as we stopped recording its income last December. Since Adient's financial performance is highly dependent on and correlated to vehicle production, adjusted EBITDA showed steady improvement month-on-month as we moved through the third quarter. In fact, after a horrible April and start to May, our June adjusted EBITDA results were about equal to June 2019 despite sales being down approximately 25% year-over-year. Speaking of monthly results, just one more data point. Excluding in April and May, Adient's margins have improved year-over-year every month through September 2019. Back on the quarter, and as Doug alluded to earlier, partially offsetting the significant volume reduction was improved business performance and lower SG&A costs. Labor and overhead performance, a reduction in SG&A costs, lower ops waste launch and tooling costs were the primary drivers.\n The approximate $45 million reduction in SG&A costs were primarily concentrated between EMEA and Americas and included increased efficiencies and positive benefits associated with the deconsolidation of Adient Aerospace and the divestiture of RECARO. But It's also important to point out, a portion of the improvement, call it, about $20 million, related to temporary benefits associated with employee compensation that are not likely to repeat next year. This temporary benefit was included in the net COVID impact of approximately $400 million. Business improvement, combined with labor and overhead efficiencies and lower SG&A, helped to contain our decremental margins to the mid-teens, call it, 16%, even as certain of the temporary cost reductions began to reverse. For example, the benefit associated with furloughing our direct and indirect plant personnel. This outcome was in line with internal expectations. And if you recall, we mentioned on the Q2 earnings call, the 13% decremental margin experienced in the second quarter would trend higher as Adient's operations restarted but would be contained below the 18% decrementals we typically expect.\n To ensure enough time is allocated to the Q&A portion of the call, we've provided our detailed segment performance slides in the appendix of the presentation. Improved business performance and lower SG&A costs, partially offset by the impact of lower volumes more than offset by the impact of lower volumes is the primary takeaway from the Americas and EMEA region. In Asia, a $15 million improvement in our Seating equity income offset the YFAI equity income from last year, but overall performance was driven by lower volumes and earnings outside of China. Let me now shift to our cash, liquidity and capital structure on slides 15 and 16. For the quarter, adjusted free cash flow, defined as operating cash flow less Capex, was an outflow of $528 million. There were several factors that had a significant impact in the quarter's cash compared to our Q2 ending balance. Excluding Adient's ABL, these factors included, at a high level, lost production. Given sales were down roughly 60%, COVID essentially cost us about two months of production in the quarter.\n We stated heading into the quarter, every month of shutdown cost us approximately $175 million of cash. Therefore, loss production resulted in a burn of roughly $350 million, again, at a very high level. Also a temporary net trade working capital headwind of approximately $530 million heavily impacted Q3. This working capital outcome was expected with the sudden shutdown and subsequent restart of our operations. Q3 working capital headwind is expected to unwind in Q4 and benefit the quarter by approximately $400 million as noted on the right-hand side of the page. For full transparency, I'd also remind everyone in our that in our second quarter, working capital provided an approximate $100 million benefit to cash flow when production immediately ceased, reinforcing Adient's working capital movements tend to smooth out over a period of time. Moving on. Partially offsetting the approximate $880 million of headwinds just mentioned was just over $240 million of dividends received from our China JVs in the quarter. This, of course, was a very good outcome and highlights the value of our strategic joint venture network.\n In fact, for the full year, the dividends expected from China will be $70 million to $80 million higher versus our earlier estimates. In addition to the China dividends, a handful of other positive benefits aided the quarter, such as deferring certain tax payments and VAT-related items, call those benefits around $70 million. Although executing these actions throughout the year enhanced our liquidity and helped us weather the storm, these $70 million of deferrals will need to be paid next year. At the very bottom of the page, you can see we ended the quarter at about $1.2 billion of total liquidity, which included our cash on hand of $1.32 billion, plus $155 million drawn of undrawn capacity under our revolving line of credit. Looking forward, we believe Q3 represented our quarterly low point of liquidity and would expect liquidity to exceed $2 billion by the end of September before factoring in any potential debt repayment. Key drivers would include cash proceeds expected from previously announced transactions, call it, $500 million; additional China JV dividend of about $30 million; the reversal of temporary working capital headwinds; and increased capacity under our revolver.\n On slide 16, in addition to showing our debt and net debt position, which totaled $4.5 billion and $3.5 billion, respectively, at June 30, we've also provided a snapshot of Adient's capital structure. Just a few comments here. We believe this capital structure not only provides flexibility to weather the storm, it provides flexibility to pay down debt after we cycle past the crisis. Subsequent to the quarter close, Adient proactively repaid $179 million drawn previously drawn on the revolver. I'd also note that capacity under the revolver is based on a one-month lag such that Q3 availability was based on May AR and inventory balances. Updating the AR and inventory balances to the end of June increased our revolver availability to approximately $650 million in July or a bit more than $300 million that reported at the end of Q3. Improving Adient's cash generation remains a top priority. As Doug pointed out, the actions Adient has taken and plans to take are designed to improve our earnings and cash flow to be profitable in a smaller sales environment. Once the crisis is in the rearview mirror, we'd look to pay down various excess debt obligations.\n Over time, post crisis, we'd expect to have 0 outstanding balance in the revolver and run with a cash balance somewhere in the $500 million to $600 million range. Finally, a few closing remarks on slide 17. First, we expect the global economic impact of COVID-19 will continue to influence the auto industry and Adient for quite some time. That said, we're encouraged by the green shoots that emerged as we progressed through Q3. Building on the positive trend in vehicle production established in our third quarter, Adient expects vehicle production across Europe and America to continue to improve sequentially in the coming months. Since Adient's financial results are highly dependent on and correlated to vehicle production and based on the environment today, we expect Adient's sales, earnings and margin performance will also trend higher in the coming months. Specifically, we expect Q4 sales to be in the range of $3.3 billion to $3.5 billion. Although this implies a 13% decline versus Q4 last year, at the midpoint, it's important to remember our sales in North America will be impacted by the launch of the F-150.\n Adjusted EBITDA for Q4 is expected to range between $180 million and $200 million. At the midpoint, this would be down versus last year's Q4, but significantly less down than would otherwise be implied by the expected decline in volume. Just to comment on our full year adjusted EBITDA, which is not shown, but I'm assuming you'll do the math, it would settle in around $580 million range at the midpoint of Q4's guide. And as you know, it includes an approximate $500 million impact from COVID. I know many of you will be tempted to take the $1.08 billion and use that as your starting point for fiscal 2021, unfortunately, it's not that simple. The biggest factor being production volumes, which, heading into our fiscal 2021, are very uncertain. More likely than not, we expect volumes to be lower than our COVID-adjusted numbers for 2019. In addition, our portfolio moves, such as the sale of RECARO and the expected sale of fabrics and YFAI, will impact the year-over-year walk into 2021.\n The team is presently finalizing our fiscal 2021 plan, which we plan to share with you later this calendar year. Moving on and back to Q4. Within adjusted EBITDA, equity income will settle in the $50 million to $60 million range, in line with last year after backing out YFAI equity income of $14 million. Based on our customer launch plans, we expect Capex to be about $100 million. And finally, for free cash flow, we'd expect Q4 to be in the range of $300 million to $400 million.\n With that, let's move to the question-and-answer portion of the call. Operator, we'll have our first question.\n | Adient plc | (NYSE:ADNT) | Aug 6, 2020 | 8:30 a.m. ET | 8 | am | 2020-08-06 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NYSE | Moving to slide 14. | Moving to slide 14. | [0.03042478 0.8454493 0.12412594] | negative | -0.815025 | 2020-08-07 | 17.030001 | 17.400000 | 15.290000 | 15.670000 | 3471964.0 | 15.520000 | 15.700000 | 15.000000 | 15.300000 | 1756340.0 | Auto Components | 2020-06-30 | 2020-06-30 | -2.78 | -2.122518 | 2020-06-30 | ADNT | -0.657482 | miss | -1.730000 | decrease | 0 | positive |
Last rows
| ticker | link | transcript | article | header | prepared_remarks | name | ticker_and_exchange | date | time | hour | ampm | day | adjusted_date | prev_date | next_date_x | stock_exchange | remarks_tokenized | sentence | logit | prediction | sentiment_score | next_date_y | o1 | h1 | l1 | c1 | v1 | o2 | h2 | l2 | c2 | v2 | industry | earnings_for | earnings_for_string | actual | estimate | period | symbol | eps_diff | beat_or_miss | price_diff | price_diff_c | still_up | agg_sentiment | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 593 | XRAY | /earnings/call-transcripts/2020/08/06/dentsply-international-inc-xray-q2-2020-earnings-c.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Dentsply International Inc</strong> <span class="ticker" data-id="206212">(<a href="https://www.fool.com/quote/nasdaq/dentsply-sirona-inc/xray/">NASDAQ:XRAY</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:00 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the Dentsply Sirona Earnings conference call. [Operator Instructions] [Operator Instructions]. [Operator Instructions]</p><p>I would now hand the conference over to your speaker today, John Sweeney.</p><p><strong>John Sweeney</strong> -- <em>Vice President of Investor Relations</em></p><p>Thank you, operator, and good morning, everyone. Welcome to our second quarter 2020 earnings conference call. I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we make certain predictive statements that reflect our current views about the future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of those most important risk factors that could cause actual results to differ from our predictions.</p><p>And with that, I'd now like to turn the program over to Don Casey, Chief Executive Officer, Dentsply Sirona.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thank you, John, and thank all of you for joining us today. We hope that you and your families remain safe and healthy. To start the call, I would like to acknowledge two groups that deserve both our gratitude and recognition. The first is our customers. Throughout this pandemic, dentists and their staff have shown tremendous resilience, whether dealing with changing local regulations, adjusting to new safety protocols or finding new ways to help patients, dentists all over the world have adopted and innovated. Their commitment to their patients is inspiring. The second group is the employees of Dentsply Sirona. Over the last six months, they have been challenged in truly unprecedented ways. Throughout, they remain focused on serving our customers, creatively addressing new circumstances and continuing to make progress on our critical initiatives.</p><p>This highlights that the people of Dentsply Sirona and the culture we are building are truly our most important assets. I would like to thank all of them around the world for their extraordinary efforts. It is a privilege to lead such a committed and passionate group. Our call today will focus on four key areas: the first is to outline our second quarter results, the second is to provide some details on how our business has been performing as dentist offices reopen, the third area provides the steps that Dentsply Sirona is taking to position the company for the future, and finally, I will review the company's near-term priorities as we navigate the current environment. As expected, our second quarter results reflect the major changes in the market. The quarter began with significant governmental actions, resulting in the shutdown of dental practices and restrictions on patient traffic. The situation improved across the quarter with month-to-month improvements in terms of dentist offices opening and patients beginning to come back. Our revenue followed this trend.</p><p>Our team continues to track patient attitudes around returning to the dental office as well as the ongoing impact of additional infection control requirements on office capacity. Based on what we are seeing, we are optimistic that the recovery is well under way globally. Our results in the quarter also reflect significant actions the company took to address the difficult operating environment. These plans were built around employee safety, meeting the needs of the customer, enhancing the financial strength of the company and making continued progress on our key strategic initiatives. To date, we have seen good results around employee safety and have not seen any major disruptions across the organization. Despite challenges presented by the pandemic, the company has been able to reliably meet customer demand. Our commercial team showed excellent creativity in adapting to new circumstances, providing an extensive array of digital, clinical education and online marketing events.</p><p>These programs have been extremely well received. A comprehensive cost control program was executed during the second quarter, involving furloughs, short-work weeks, salary reductions and spending controls. These efforts contributed to the drop in SG&A expenses in the quarter. While the business has begun to restart, this program will remain in place until the trajectory of the recovery is better understood. Our supply chain has been disciplined around inventory, and there has been a real emphasis on protecting our cash flow. Finally, the company undertook a series of actions to bolster its liquidity and financial position. While there is a pressing need to manage the disruptions caused by the pandemic, our team is focused on positioning the company for the future. Since announcing a restructuring in late 2018, Dentsply Sirona has made significant progress against the goals we had laid out.</p><p>Our work on continuously challenging ourselves has shown there is still further opportunities to improve our performance. Therefore, today, we are announcing additional portfolio actions that expand on the original program. These include plans for exiting the traditional orthodontics business as well as parts of our analog lab business. I will discuss details later in the call. These steps, while difficult, allow the company to focus on higher growth and higher-margin digital areas where we believe Dentsply Sirona has strategic advantage. Moving to slide seven, where we summarize our 2Q 2020 results. Second quarter revenues were $491 million, down 50% on an organic basis due to the impact of the coronavirus. Adjusted operating income was negative. Non-GAAP EPS for the quarter was a loss of $0.18. Cash flow was actively managed in the second quarter, driving cash flow from operations of $175 million, which was up 21% compared to prior year.</p><p>I will now turn the call over to Jorge, who will review the quarterly results and provide an outlook.</p><p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Thank you, Don, and good morning, everyone. The second quarter was obviously a challenging one for the global economy and for many industries, including dental. On slide nine, we show our second quarter non-GAAP 2020 P&L. Starting with the top line. Organic sales were down 50% as compared to the prior year. In the U.S. and Europe, with some minor exceptions, dental practices limited their activity to emergency procedures in April and much of May and then began to reopen as we moved into June. As we shared on our last earnings call, we saw declines of 60% to 80% in April in certain geographies, with the U.S. been hit the hardest, but our revenue trends improved gradually each month, finishing down about 40% compared to prior year in June. We also saw a gradual improvement from the first to the last week in June. So it is clear that we're seeing a recovery, but have yet to get back to a normal level of sales.</p><p>Thank you, Don, and good morning, everyone. The second quarter was obviously a challenging one for the global economy and for many industries, including dental. On slide nine, we show our second quarter non-GAAP 2020 P&L. Starting with the top line. Organic sales were down 50% as compared to the prior year. In the U.S. and Europe, with some minor exceptions, dental practices limited their activity to emergency procedures in April and much of May and then began to reopen as we moved into June. As we shared on our last earnings call, we saw declines of 60% to 80% in April in certain geographies, with the U.S. been hit the hardest, but our revenue trends improved gradually each month, finishing down about 40% compared to prior year engine. We also saw a gradual improvement from the first to the last week in June. So it is clear that we're seeing a recovery, but have yet to get back to a normal level of sales.</p><p>Gross profit was $207 million or 42.1% of sales, down from 57.7% in the prior year quarter. As it is the case in solid and material reductions in volume, gross profit margin is impacted by the fixed cost base, which is difficult to address in the short term. Examples of this cost include depreciation, leases, maintenance of manufacturing and logistic facilities and costs related to ensuring compliance with high manufacturing standards. Gross profit margin was also impacted by higher-than-average inventory reserve expenses of approximately $17 million, primarily as a result of lower sales. SG&A of $249 million was down a substantial $132 million, which is approximately 35% lower as compared to prior year. During the quarter, we took decisive action to reduce our SG&A costs, resulting in the steep year-over-year decline. One area in SG&A that actually increased over last year was bad debt expense, which saw an uptick of $15 million year-over-year. These significant P&L fluctuations were driven by the ongoing market disruptions and generated an operating loss of $42 million in the quarter.</p><p>Last year, our operating profit was $202 million in the second quarter. Interest and other increased by $9.9 million versus last year, driven by the issuance of $750 million in long-term debt, the addition of new credit facilities and the termination of certain FX hedges. The non-GAAP tax rate was 27.5% in the quarter, up from 25.3% in the prior year, a function of the change in the estimated amount of pre-tax income and a change to the expected income mix. Non-GAAP EPS was a loss of $0.18 as compared to non-GAAP EPS of $0.66 in the prior year quarter. Moving on to slide 10, where we review our Consumables segment performance. Reported sales were $187 million, down 58.6% and down 57.7% on an organic sales basis. All of our product groups and consumables were negatively impacted by the temporary closure of dental offices. While our Consumable sales show a steeper decline than our T&E sales, both segments actually performed relatively similar from an end customer perspective. Let me explain the two factors that contributed to the larger decline in our Consumable sales. First, there's a difference in order lead times. Consumable deliveries tend to match demand almost simultaneously, up or down.</p><p>Due to the nature of the products, T&E has a longer order lead time, and therefore, deliveries continued over an extended period even after dental procedure volume has slowed down at the beginning of the quarter. The second factor impacting Consumables more than T&E is the fluctuations in inventory levels in the biller network. During severe market conditions, it is typical for companies to preserve cash by lowering inventory balances as much as possible. We saw a steeper decline in Consumables network inventory. So when you account for all of these variables, we believe both segments declined at relatively similar levels. Consumables operating margin was negative 9.4% as compared to 27% in the second quarter of 2019. There are two primary reasons for the decline in Consumables margins. The first reason is that the Consumables segment experienced a steeper fall off in sales compared to T&E. Second, the Consumables business is more plant and infrastructure dependent and requires more volume to run efficiently. We have more manufacturing plants dedicated to Consumables.</p><p>And this means a higher fixed infrastructure cost for this segment. This is why we have been taking steps to consolidate our footprint and reduce our fixed cost base. In the past couple of years, we have completed several portfolio shaping actions, including FONA, 1-800-DENTIST, SICAT and the Surgical business of Wellspect. In addition, the two portfolio shaping activities we are announcing today will further consolidate our manufacturing footprint and will increase productivity and decrease fixed costs. Moving on to slide 11, where we highlight our Technologies and Equipment segment. Net sales were $304 million, down 45.6% as compared to prior year. Organic sales for the quarter were down 43.6% versus the prior year. Equipment and instruments, digital dentistry and implants all experienced similar levels of decline in the quarter, driven by the lower sales resulting from COVID-19. Our Healthcare business saw a slight decline in Q2 after posting strong Q1 as Healthcare systems were getting ready for the first major waves of COVID-19. Technologies and Equipment operating income margin was negative 1.3% versus 17.2% in the prior year quarter.</p><p>On slide 12, we show our business performance for the second quarter on a regional basis. U.S. sales of $131 million declined 60.3% compared to the prior year. This represents a decline in organic sales of 60%. In the U.S. market, Consumables declined slightly more than T&E. European sales were $215 million, down 49% compared to the prior year. Organic sales were down 46.9% versus last year. In Europe, Consumable sales declined more than Technologies and Equipment on a percentage basis. Rest of the World sales were $144 million, down 44%, and organic sales were down 41.9%. Rest of the World Consumables declined more than T&E sales in the same in the second quarter. On slide 13, we show our cash flow performance. In the second quarter of 2020, cash flow from operations was $175 million as compared to $145 million in the prior year quarter. This strong cash flow generation was the result of a disciplined approach to curtailing expenses and reducing working capital without sacrificing key strategic investments. Working capital generated a significant boost in liquidity in the quarter. We were successful in achieving meaningful reductions in accounts receivables and inventory balances.</p><p>We expect some of this cash will be injected back into working capital as demand and production volumes climb back up to normal levels. In terms of capital expenditures, we spent $13 million in the second quarter of 2020, down from $27 million last year. Free cash flow was a strong $162 million in the quarter, up 37% as compared to $118 million in the prior year. In the quarter, we paid $22 million in dividends for a total of $184 million returned to shareholders through dividends and share repurchases in the first six months of 2020. At the end of June 2020, we had a strong liquidity available, comprising $1.1 billion of cash and $1.2 billion of committed credit facilities. The efforts we made during the second quarter ensure that we have ample liquidity available to invest and grow the company as the economy recovers. On slide 14, I'd like to talk about the significant actions we took to reduce operating expenses in the second quarter of 2020. Our efforts to reduce costs in the quarter were multi-faceted. All levels and functions of the enterprise contributed to significant compensation savings.</p><p>Each part of the organization up to and including the Board of Directors and executive levels have stepped up and helped in these efforts. As of today, most of our employees who were impacted by these measures have returned to work or to normal pay levels. The next largest area for cost reductions was discretionary commercial spend such as advertising and promotions. It was logical to reduce this spend when dental offices were closed, and the returns could not be realized. We also achieved significant savings from reductions in professional services and, of course, travel expenses. Together, all of these actions delivered a reduction in SG&A of 35% versus last year. With respect to business trends for the remainder of the year, I'd like to make a few comments. First, let me start with current volume trends. All regions recovered from their low point in April and improved by 20 to 40% points by the end of the quarter. Additionally, in June, the last week of the month was significantly better than the first week. And we are pleased to note that the positive momentum continues into July, with July sales approaching or surpassing 2019 levels, depending on the region and product groups.</p><p>There are still some gating factors in place, including the availability of personal protection equipment, new infection prevention protocols reducing office capacity and overlapping regulations, all of which impact the shape of the recovery. Together, these factors point to a gradual as opposed to a sudden snapback in demand. Let me give you more details from a geographical perspective. In the U.S., virtually all dental offices are now open, and we continue to see signs of improvement, with July volume trending better than what we saw in June. In Europe, we also saw July trends improving sequentially. With regards to the Rest of the World, in APAC, some of the markets turned positive in July, with good traction in China and Japan and some lingering concerns in Australia. Latin America remains a challenging market as COVID-19 continues to impact our business in Brazil and other countries in the region. Moving forward to the second half of the year. As we announced today, we are accelerating actions to fund growth areas and improve efficiencies. As we did in Q2, we will continue to drive a disciplined resource allocation process that emphasize return on investment and sustainability of our growth initiatives.</p><p>With that, I will now turn the call back to Don.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Jorge. And moving to slide 17. As I mentioned earlier in the call, in November 2018, we put a plan in place to accelerate growth, improve margins and simplify the organization. Our results through 2019 and the first quarter of 2020 show significant progress. The execution highlights of our plan include: accelerating growth behind new products, including Primescan and Primemill as well as other new products in our Consumable portfolio. The pipeline of future new products has also been enhanced. The company has made major investments in critical areas like our digital product portfolios, digital commercial capabilities and growth priorities like our SureSmile clear aligner business. Dentsply Sirona has implemented a new organizational structure, centralizing supply chain and other functions, while creating a unified commercial structure. There have been major initiatives designed to transform the finance, HR and IT areas.</p><p>Further, we've undertaken multiple portfolio-shaping activities, including the ones announced today. The restructuring plan is a multiyear initiative. As part of that, the organization has embraced the need to continue challenging ourselves to go beyond the original plan and deliver better results. That work has shown there are significant opportunities in both the near term and longer term. Moving now to slide 18. Over the last several quarters, as Jorge mentioned, we have exited several underperforming businesses. These reduce our cost and complexity, while serving to enhance our growth and margins. The team continually reviews all our business against the framework around future growth opportunities as well as strategic fit. In the area of orthodontics, we believe that the clear aligner space is an attractive opportunity for Dentsply Sirona. SureSmile now offers a comprehensive digital treatment plan that positions the company well in this rapidly growing market.</p><p>Going forward, we will focus all our efforts in the ortho space on the clear aligner area. We believe this offers the opportunity to grow, innovate and take advantage of many of Dentsply Sirona's unique strategic advantages, including our large CEREC user community. As a result, we are exiting the traditional orthodontics business, which includes brackets, bands, tubes and wires. The traditional orthodontic business is a component of the Technology and Equipment segment and had net sales of approximately $132 million in 2019. Likewise, in our lab business, there is a clear opportunity to focus on the digital space, which is showing good growth rates and solid margins. It's a place where innovation will be rewarded. Based on our analysis, it is critical to focus all our lab resources in the digital area going forward. As such, we are announcing plans to exit the analog portion of the laboratory business that manufacture removable dentures and related products.</p><p>This business is a component of the Consumables segment and had net sales of approximately $44 million in 2019. Together, the portfolio-shaping initiatives and additional actions are expected to result in the closure of several facilities and an incremental reduction of approximately 6% to 7% of the company's workforce by the end of 2021. The ongoing execution of the restructuring will enhance Dentsply Sirona's continued efforts to grow revenues, expand our margins and simplify the organization. Slide 19 lists our priorities for the back half of 2020. They include executing on our comprehensive restructuring plan, pursuing our growth initiatives aggressively and meeting our financial objectives. In conclusion, the COVID pandemic will continue to impact our industry and our company for the foreseeable future. Current trends are positive and a reason for optimism, but we will need to continue to adapt to the circumstances as they change.</p><p>We believe we have a comprehensive plan for both the short term and longer term to deliver value for our customers and our shareholders. Further, the company has maintained its focus on our priorities around growth, margin expansion and simplifying the business. Our financial strength, broad portfolio and global reach are position us well to succeed and win in the dental industry. It's hard to know what the new normal is or when it will arrive, but our internal theme is that teeth do not heal themselves. Our team is optimistic about the fundamentals of the industry, and we embrace the current challenges and are confident in our strategy, our customers and our team. Thank you.</p><p>And with that, we'll take questions.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-25872">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-25872');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] Our first question is from Jeff Johnson with Baird. Please go ahead.</p><p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p><p>Thank you, good morning guys. Can you hear me OK? I think I was on mute there.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes. We got you Jeff. Yes.</p><p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p><p>Great. So Don, I think I just want to start with the July comments. I really want to understand maybe message that you want to have out there. It sounds like you could make the argument that July was getting back toward flattish year-over-year levels according to what Jorge said. But how much of that might be sell-in that was recovering off some sell-in issues earlier in the quarter or earlier in 2Q?</p><p>Does your sell-in is it starting to match kind of the sell-out at this point? And again, I know you're not guiding, but for 3Q, should we think July maybe isn't sustainable as you get into August and September, if there is some backlog helping in that July number?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes. Thanks, Jeff. Look, I think Jorge said it clearly in the prepared remarks, as we're looking at July, there's places that have we're seeing good progress. In some cases, it's actually exceeding 2019. Your specific question about how much of that is inventory rebuild, it's hard to see exactly. There's a couple of things we're looking at. And that's one of the reasons we're not being OK, let's just go project July into August, September and later in the fourth quarter. The things we're looking at is patient volume, and we've seen that as good. Office capacity, we see office capacity kind of improving. Our patient tracking is telling us that confidence in the dentist office continues to go up. But there is a pocket that's going to be reluctant, at least in the U.S. to go back for a little while. And what that, in our mind, means that, OK, look, if we're getting capacity in the dentist office back to close to normal, that's going to take a little bit of time. I think we're working through a bolus of patients right now.</p><p>And then I think from an inventory perspective, our dealers and the dentist office ultimately are working through the fact that when the pandemic started, I think people hit the brakes pretty hard on stuff that's ordered almost every day. And in our mind, that's kind of the consumables space. And you could see, Jeff, the difference between our Consumable and the T&E side, and we believe that is a lot to do with, OK, we don't know how long the office is going to be closed, we're going to stop building inventory on the daily stuff. And as a result, there may be some build back here. But look, in my summary, I was pretty clear on saying, "Hey, look, we we're happy that we saw consecutive month-to-month sequential improvement in overall demand." We're seeing that at the retail level. We're happy that July has continued that trend, and we're happy to see that in some cases, we're actually tracking better than 2019.</p><p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p><p>Understood. That's helpful. And just as a follow-up, thinking about 2021 conceptually, we all know what the ADA is saying about high likelihood that dental consumption and dental industrywide revenues are down relative to 2019 level. I don't think anybody would really argue with that, at least looking at things right now. But with some of the extra restructuring efforts you're taking now.</p><p>Some of the tailwinds from the restructuring that we're probably still continuing from the past plan, how do you think about margins, especially next year? Can they get back to 2019 levels with revenue that at least is approaching 2019 levels next year? Or is there a lag in kind of the margin recovery relative to how we think about revenues next year?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes, Jeff, it's early for us to really forecast 2021. I would tell you the steps we took around the restructuring, though, reflect our interest in sitting there saying, "Hey, look, we need to get back on the margin progression." I mean, we've been saying since November 2018, how do we grow, how do we get our margins improving. And I think we have to take organizational steps to do it. I think the results here show you that we think we've made some good progress. I mean, basically, through the first quarter of 2020, we were tracking on a margin basis. And what we've seen, obviously, our margin is revenue dependent. And look, if revenue is down 20% in 2021, that's obviously going to have an impact on the business. We don't think that's going to happen. But we are taking specific steps now to sit there and say, irregardless of whether the category is up 2% or 3% or down 2% or 3% or up 10%, down 10%, we want to be taking steps toward margin accretion.</p><p>And as we get out of the traditional ortho business, we got out of the analog lab business, those are all part of the ongoing restructuring designed to help us really take charge of our ability to drive margin accretion going forward. And I'm not going to say it's going to be revenue independent, but we think we can take steps at a certain revenue base that we're really going to be able to drive margin. And we were very clear I joke with John Sweeney occasionally that we picked our revenue targets to match the years just to make sure that we could always communicate it. So we've always said 22 in 2022. And internally, what we're trying to focus on is, look, we think 22 is attainable. We don't know if it's going to happen exactly on the trajectory based on what we're seeing with COVID. Is COVID and the knock-on effects of that, is that a six month issue, is it a nine month, 12-month issue, but we want to be marching back toward that target. It just may take us a little bit longer to get there.</p><p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p><p>Thank you.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>And our next question comes from Tycho Peterson with JPMorgan. Please go ahead.</p><p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p><p>Hey, are you able to talk about how much of the Consumable pressure in the quarter was inventory destocking versus slower orders? And how much incremental risk is there going forward with distributors around potential additional destocking?</p><p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Tycho, this is Jorge. It's hard to give any precise number. But as Don just indicated, in the case of Consumables, there is a the order lead time is very short. And so when the pandemic hit customers and dealers, and in general, in the marketplace, there was a reaction to manage inventories very, very closely. And when we look at the data of retail sales and our sales up, there are a lot of indications that show that there was a reduction in the inventory levels that we historically or typically carry in the network. So there was an element of that. And when that comes back to the typical levels it is hard to project, some of that may be happening, as Don indicated.</p><p>But I don't think that is something that for us is going to be meaningful from a long-term perspective. Listen, at the end of the day, we always want to make sure that our sales match retail sales. That is our key objective. That's how we make money. There will be always small fluctuations in the network. So I think given the magnitude of the changes that we experienced in the second quarter as a result of lower revenues and the uncertainty that we still have in many places, I think that is that noise is not actually meaningful in terms of explaining our performance and our trajectory over the next several months.</p><p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p><p>Okay. And then, Don, on the portfolio reshaping, I'm curious, the decision to exit ortho. I always thought part of the picture on the clear aligner was the ability to go in and do hybrid cases and leverage that strong ortho channel as you push out SureSmile. So I'm curious if there is risk of dissynergies here? And how do you think about that?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes. Thanks, Tycho. We're actually there's a component of the wire bending aspect of SureSmile that we're keeping. What when we say how we kind of delineate traditional ortho, it's kind of the brackets bands that would go straight up on an orthodontist using orthodontia. We believe hybrid is meaningful. We believe that it's a differentiator for SureSmile. So we're actually keeping those components. So that piece of traditional ortho and the piece that actually came with the OraMetrix acquisition is going to stay with that. And then what we're seeing is where we're getting real traction. SureSmile tends to be right now focused around our CEREC base.</p><p>We kind of made that shift basically in October of last year, and that's part of the One DS program, and we're seeing good traction there. So as we look going forward, we didn't feel that there were going to be dissynergies associated with getting out of traditional orthodontia treatment among the orthodontist group. So as we focus on growing in the future, we tend to think, all right, how do we take care of how do we take advantage of our digital assets and how do we really look at expanding in places that are not necessarily tied to kind of the traditional orthodontia model.</p><p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p><p>Okay. And then just lastly, any thoughts on just the capital equipment appetite as we think about the back half of the year and then think about Primescan and Primemill? Can you just talk on to what degree you think there could be pent-up demand? And any need on your part to be a little bit more flexible in terms of financing or pricing potentially?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>It's been interesting, Tycho. Even before the pandemic hit, we were really beginning to shift to one our theory of One Visit Dentistry. And with Primemill and the speed of Primemill, it really made that a reality. I mean you can get patients in and out with a single unit crown in an hour plus. So we had made that shift. And it was interesting in April, when everything went down, we really shifted to a bunch of digital whether it was product demonstrations or kind of taking people through what One Visit Dentistry really means. We got a pretty good reception. So what we've seen to date, and you've actually seen the results that there's a pretty good appetite in our mind for Technology and Equipment. Now whether it's spread across?</p><p>Are we going to see treatment centers? And are we going to see imaging? Not sure. But we feel very good about Primescan and Primemill and the opportunity for dentists who are basically going to be dealing with a patient population that may be a little bit, "Hey, do I want to go to the dentist three times in during the pandemic to get a crown fixed or can I get that done one time." You're also seeing a lot of dentists that we've been talking to and we've been seeing a fair amount of success with saying, "Hey, look, I got to change how I practice and they used the kind of the downtime during the pandemic to think through that." So we're we feel good about where we are from a Technology and Equipment space in the back half. And in a large part, it's due to the, first, the new products we pushed out, but also the change in messaging and how we're pitching these products.</p><p>So ultimately and look, we're working with our dealer partners globally right now to make sure that we're helping dentists access this material. But we're do I see a whole bunch of pricing pressure and crazy financing options coming on our Technology and Equipment? No.</p><p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p><p>Okay, thank you.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Tycho.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from Steven Valiquette with Barclays. Please go ahead.</p><p><strong>Steven Valiquette</strong> -- <em>Barclays -- Analyst</em></p><p>Thanks, good morning everybody. A couple of quick questions for you. First, your comment around July being a fairly flat year-over-year on a global basis is obviously pretty positive. I know you don't want to give any specific guidance, but just kind of eyeball on the street consensus estimates for the third quarter. They call of revenues to be down some 20% to 25% year-over-year.</p><p>So I'm just wondering based on what you're seeing in July and barring any other major changes in the landscape, is that a number that seems like maybe that's too conservative on the revenue outlook as far as where consensus is? Just curious to get your thoughts around that.</p><p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Jorge here. Listen, it is early for us to be able to extrapolate from the July numbers. And as you can appreciate, there is a lot of different data points coming from different regions. And there are some markets that are doing much better in terms of the number of offices that are open, markets that are good from a volume perspective. We still have lingering concerns in places like Australia, parts of Latin America, and there are some spots in Europe that are also still challenging. So it is very hard to make a judgment with respect to those numbers.</p><p>I think what we are we're really encouraged by the fact that sequentially, the last three months have been moving in the right direction. But from a planning perspective, internally, we're trying to we continue to work with scenario planning. We are preparing the company for a multiple set of outcomes in the next few months and quarters, I think it is a prudent thing to do. So hard to tell you if that number is right or not.</p><p><strong>Steven Valiquette</strong> -- <em>Barclays -- Analyst</em></p><p>Okay. That's helpful. One other quick clarification question. On the exiting of the traditional orthodontics and parts of the analog lab business, are these businesses that could be monetized through asset sales? Or are these just full shutdowns? Maybe just give us a little more color on the decision tree on shutdown versus asset sale?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes, Steve. As we look at it right now, we're making the announcement to get it done. Obviously, we'll look to dispose the assets in a way that is most beneficial to the company. If there's some asset sales, we'll certainly look at it. If it's a full shutdown, we gave you guys the numbers based on the worst-case scenario. And obviously, we're going to work to improve that. But again, the process, because we mentioned in the prepared remarks, it's multiple plants in multiple locations.</p><p>Obviously, you start with the Works Council and you go through a lot of different things. But the numbers we gave you represent the base case, and we're going to work hard to improve versus that. And there is the opportunity to do better than what we said.</p><p><strong>Steven Valiquette</strong> -- <em>Barclays -- Analyst</em></p><p>Okay. I appreciate the extra color. Thanks.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Steve.</p><p><strong>Operator</strong></p><p>Thank you. Our next question is from Michael Cherny with Bank of America. Please go ahead.</p><p><strong>Michael Cherny</strong> -- <em>Bank of America -- Analyst</em></p><p>Good morning and thanks for the taking my questions, I wanted to just dive back into the July commentary specifically. I apologize to keep harping on this, but I just want to make sure it's as clear as possible. Jorge, are you saying that what you have seen so far in July on a total dollar basis across the book is similar to 2019? And is there any way specifically to think about how that's factoring into the U.S., in particular, in terms of the quantity of dollar basis versus some of the other growth rates where there might be some countries that did not have any meaningful COVID spikes that could be growing clearly at a faster clip?</p><p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Yes. Michael, thanks for the question. We are still trying to digest all the July numbers. There's a lot of data to look at from a product perspective, from a geography perspective. As I indicated before, July, definitely trended better than June. So that is very good. But it is t depends on the region. It depends on the geography and at this and on the products. At this point, I can't give you a breakdown because there's some analytics that we still need to do. Overall, the total portfolio is getting closer to 2019 numbers. And in some instances, it did better than 2019. And that is definitely a substantial improvement versus June.</p><p><strong>Michael Cherny</strong> -- <em>Bank of America -- Analyst</em></p><p>And then just one more question on aligners. How do you think about differentiation strategy that you're going to go forward with? I know a lot of it was tied historically to the integration you had with Omnicam with CEREC and everything. As you think about where you compete, every aligner seems to have its own specific angle and what makes it better, where do you think that SureSmile will shake out is what makes it better or the best or what XRAY can offer is differentiated than everyone else?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes. Thanks, Michael. I would say that it's our system. Look, between Omni and Primescan, we think we've got a pretty good installed base. We have a very loyal user group there that is looking to practice at the highest level of their license. So when we can add something that's integrated and seamless like SureSmile into the package. And particularly, when we came out with SureSmile 7.6, it's really seamlessly integrated into our base digital assets. It becomes really easy to use. And we feel with 7.6, we're now able to compete across the broad portfolio, get Class I, Class II, Class III. We think that our treatment planning software is second to none. I mean, we feel it's really, really competitive. And we're very comfortable with the clinical results we're seeing. And as we go into kind of our installed base, we feel very good about that right now.</p><p>And look, every single day, we get better and better at beginning to think about Dentsply Sirona, not as individual product companies where we're sitting and saying, "Hey, we're going to sell you an Omni, we're going to go sell you Prime. And then, oh, by the way, maybe next week, somebody will come in with Suresmile." No, it's really we've begun to focus much more on how do we focus on the customer as one company and as part of that one company approach, stuff like DS One One DS, excuse me, we really are going in and saying, "Hey, look, how do you think about using these digital assets to make life easier around doing orthodontics with clear aligners? How do you really think about implants differently?" And again, we're working hard to actually bring this idea that we're the dental solutions company to reality.</p><p><strong>Operator</strong></p><p>Does that answer your question, sir?</p><p><strong>Michael Cherny</strong> -- <em>Bank of America -- Analyst</em></p><p>Yeah. Welcome back last year.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Michael, we lost you.</p><p><strong>Michael Cherny</strong> -- <em>Bank of America -- Analyst</em></p><p>And I'm still here. Thanks. Thanks for the color.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>And our next question is from Jason Bednar with Piper Sandler. Please go ahead.</p><p><strong>Jason Bednar</strong> -- <em>Piper Sandler -- Analyst</em></p><p>Good morning, thanks for taking the questions here. Don or Jorge, thanks for all the restructuring plan color. Wondering in the orthodontic business, I mean you've mentioned here a few times leveraging the CEREC installed base with clear aligners. I think this makes a ton of sense. But I mean, should we interpret your CEREC comments to be that you're going to be emphasizing SureSmile principally in that GP channel? Or do you have a strategy to continue to target the orthodontics channel that doesn't have that same CEREC owner base?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes. Look, we're happy to take SureSmile into the orthodontists office and the GP office. What we're seeing is, again, we want to play to our strengths, and we do have a large installed base. And when we do programs like One DS, we're obviously trying to package workflows together in such a way that we're there's real benefit to the dentist, we're seeing more success there. So look, we will continue to pitch SureSmile across both the orthodontic as well as the GP channel. We think we've got more innate advantages in the GP channel right now.</p><p><strong>Jason Bednar</strong> -- <em>Piper Sandler -- Analyst</em></p><p>That's helpful. Okay. And then I wanted to ask actually a new product question here, actually partially related to the prior question. So I appreciate its policy here not to discuss new products before they're officially launched. But instead of talking specifically to the recently approved large field of view imaging system are maybe any 3D printing plans you might have with Prime print. Maybe you could talk to what you see in the market from an opportunity or demand perspective for each of those categories, each of large field of view and also in Office 3D printing?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>On wide field of view, we're filling a gap in our portfolio that it took us a little while to get there, but we feel very good about that right now. And if you look at what we've done with our Orthophos SL and our Align and now wide field of view, we feel that we're very competitive in the imaging space. And now in terms of where do we think about the macro demand for imaging equipment again, if you look over the last six months, and again, the pandemic really started at the end of the first quarter, and we've seen regions begin to recover. We've seen good solid demand across the board in Technology and Equipment. And it's when you start looking at things like wide field of view, it's really not necessarily about I'm just replacing my x-ray machinery.</p><p>It's what procedures do I want to do? And wide field of view, and particularly when you start looking at 2D and 3D kind of imaging products, it lets you do more procedures, it lets you do better implants, lets you do better endo, lets you do better orthodontist. So we think that demand is it going to gyrate a little bit as we recover from the pandemic? It could. But we've seen demand remain pretty solid on here. And in terms of printing, we haven't really discussed that. And look, our one of the challenges in this space versus other med device spaces where you can really put your pipeline out, we tend to play things pretty close to the vest. What I would tell you is that our new product portfolio work has been one of we kept saying in the prepared remarks, we stayed focused on our key strategic initiatives. Well, one of those is new products.</p><p>And what we've been working on internally is how do we take the five to 10 most important products, whether that's in the Endo implant or in the Technology and Equipment space and keep making progress on it. And we're not backing off on what we think our launch schedule is on some of those major launches. And again, we think it positions us well as people come out of the pandemic.</p><p><strong>Jason Bednar</strong> -- <em>Piper Sandler -- Analyst</em></p><p>All right, thanks very much guys.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Jason.</p><p><strong>Operator</strong></p><p>Thank you. Our next question is from Elizabeth Anderson with Evercore. Please go ahead.</p><p><strong>Elizabeth Anderson</strong> -- <em>Evercore -- Analyst</em></p><p>Hi, good morning guys. I just was wondering if you could help us put numbers around the new ortho strategy? Can you talk about the maybe some comments about how you saw volumes trend within orthodontics? And then also, if anything you can talk about in terms of the size of the revenue base and/or growth rates would be helpful, just in terms of framing that opportunity on a go-forward basis?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes. Thanks, Elizabeth. We haven't broken out the total orthodontia business, and we don't give the clear liner number specifically. What I would tell you is that what we've seen over the last year is accelerating growth behind SureSmile. And we've seen actually very positive trends even coming out of the pandemic. So that's one of the reasons we feel very comfortable about that decision. Look, we feel that Dentsply Sirona has an opportunity to become a solid number two in the space, and we're going to work toward that.</p><p>So you can do some math around that. Look, ultimately, we've been pretty consistent in saying we want to grow, and we want to do margin accretion. So the steps we're taking around getting out of the traditional ortho business and really focusing on clear aligner helps us do that. So our bet and belief is that the clear aligner space is going to be a significant contributor to our aggregate growth rate over time.</p><p><strong>Elizabeth Anderson</strong> -- <em>Evercore -- Analyst</em></p><p>Okay. Perfect. That's helpful. And then given, obviously, you guys have a pretty substantial liquidity position right now. How do you see that playing out if you sort of assume that, hopefully, we're through the worst of COVID and things continue to improve from here?</p><p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Yes. Listen, our capital deployment philosophies are not changing, have not changed. I think it was absolutely the right thing to raise more liquidity to be in a position of strength from a financial standpoint. We were encouraged actually by a number of shareholders to be in that position, which we totally agree with. At this point, we want to keep doing what we're doing, being very prudent with our balance sheet, being very diligent with our cash flow. You probably noticed in the second quarter, we had a very strong operating cash flow, very good free cash flow. And other parts of our deployment are not changing for now. We paid our dividend, and we have no plans to change the dividend at this time. Once things go back to a more normal level, we'll reassess where we are at that point.</p><p>We will look at all of the demands for capital opportunities that we have at that time, and we'll make whatever decisions we think are in the best interest of our shareholders as we deploy that capital. But for now, I think the focus is on the recovery is how to ensure that we have a very stable financial position. How we are able to fund strategic initiatives, some of which Don has talked about that. We want to make sure that even in a low revenue environment and low profitability environment, we keep funding those initiatives. And that is one of the reasons we have that capital. We want to keep investing in the organic growth of the company for the time being.</p><p><strong>Elizabeth Anderson</strong> -- <em>Evercore -- Analyst</em></p><p>Okay, thank you very much. That's helpful.</p><p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Thanks, Elizabeth.</p><p><strong>Operator</strong></p><p>Thank you. And our next question is from Steve Beuchaw with Wolfe Research. Please go ahead.</p><p><strong>Steve Beuchaw</strong> -- <em>Wolfe Research -- Analyst</em></p><p>Hi, good morning and thanks for the time here. I wanted to ask one very specific question and then one kind of big picture question. The specific one is actually about Germany. I wondered to what extent you'd willing to talk about growth in Germany, operating conditions there. And to what extent you think that's a good barometer for what the business might look like over the next several months in the event that we get the virus under control? And then I have a follow-up on strategy after that.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Steve. Conditions in Germany are if you were going to go around the world are pretty good. And again, I think Jorge said it well, it depends on the business and there's been different reactions to different businesses, and we kind of look at DACH together, which is Germany, Switzerland and Austria. But conditions there, if that's a harbinger of the future, I would tell you that things do get closer to normal. I mean, there's obviously again, the same things we see over here that we keep tracking is what's office capacity around the new infection protocols. And again, that keeps getting better. Things are better in July than they were in June, just as the dentists and their staff get more used to that.</p><p>And then patient attitudes. It's interesting, the patient tracking that we did in Germany showed that the from a patient perspective, there was less change in Germany than there was in the U.S. around the pandemic. So there seems to be a little bit more of a stable attitude toward visiting the dentist office. So ultimately, if things look like Germany, it points to the fact that things do get back to normal.</p><p><strong>Steve Beuchaw</strong> -- <em>Wolfe Research -- Analyst</em></p><p>Okay. Much appreciate it. And then Don, I wanted to borrow from your experience a little bit, if I could. You're a med tech guy. And you came into dental with a different perspective on what the industry could be and how businesses could run? And COVID has certainly changed some of that thinking. I wonder as you keep your med tech hat on and you think about what you want the business to look like and how practice evolves over the next, however, many quarters or months.</p><p>And we get to the point where we're in a new post-COVID normal, how is your thinking how has your thinking evolved in terms of what you want the business to be, what you think the practice looks like? I know you have a focus on digital that was there before. Can you just give us a sense for maybe what you might have learned in the last few months? And how your thinking has evolved on that future strategic vision?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Steve. I think what COVID has done has brought into sharper focus what I think the industry is going to need to be and whether it gets there in two years, three years, five years. I think it's going to accelerate a couple of trends. I mean the first is that I think DSOs are going to pick up. I don't think it's going to happen in the immediate short term. But I think if you look at in Europe, in the U.S. and even in places in Asia Pacific, where the pandemic exposed, sometimes some of the offices are kind of right on the margin and the dentists may feel it's better to practice in a larger group. So I think there you may see a shift that way. I think the second big thing is the idea of when you say digital, I pushed digital pretty hard. In my mind, what I think, whether it's the DSOs or the individual dentists are going to be doing is they're really going to be evaluating their practice more critically.</p><p>And I think COVID brought that into sharp focus that, "Hey, look, I've got 40 hours to see patients, how am I allocating time against procedures? And how am I thinking about what procedures can I do? And what procedures do I really want to develop within the practice? And I'm going to address that accordingly from the equipment and where I emphasize our training and whatnot." So I think what we've seen with clear aligners is something of that's going to go into the rest of dentistry. When you think about implants, when you think about even basic endo work, I think the increased digitization of diagnostics and how that can help dentist practice at the highest level of their license it's going to accelerate. So I would say, Steve, I don't think anything has dramatically changed strategically.</p><p>What I think it's and you read all the books and after major disruptions and dislocations, you tend to see new trends go. I think what might have taken a decade because dental tends to be a little bit slower than what we saw in med tech, I think it's going to accelerate pretty dramatically.</p><p><strong>Steve Beuchaw</strong> -- <em>Wolfe Research -- Analyst</em></p><p>I couldn't agree more. Thanks for all the help you all right.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Steve.</p><p><strong>Operator</strong></p><p>Thank you. And our next question is from John Kreger with William Blair. Please go ahead.</p><p><strong>John Kreger</strong> -- <em>William Blair -- Analyst</em></p><p>Hi, thanks very much. Don, curious, could you give us an update on the your integration efforts? I'm sure COVID has impacted them a little bit, but you had a pretty long list across commercial manufacturing and R&D. Just kind of give us a sense about where that stands and to what degree the pandemic has kind of altered the thinking around them?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>John, first, thanks for the question. When I would say when we outlined things in November of 2018, we kind of said it was a three year program. I would say that and particularly with the announcements we made this morning around traditional ortho and analog lab, it kind of points to the fact that we're pushing a little bit faster, and we're pushing harder. I think the pandemic has accelerated our thinking. And look, when you see the revenue challenges in the second quarter, it also highlights some of the things that we need to get after even faster. So that's kind of what I would tell you. I it's really interesting. Internally, we keep trying to tell people, "Hey, look, it's not as if we're going to get the restructuring done." And then that's it. We're not changing ever again. So I've been trying to condition the organization to understand that this is a marathon, and the restructuring might have been only the first 10K of that.</p><p>So look, I would tell you, in terms of the plan we laid out, we're more than halfway done. But I would also tell you, it's great as I brought in a new team with people like Jorge, we've got a terrific supply chain leader. We've actually now got all the commercial people reporting into one person, Walter Petersohn. We're finding more and more stuff that we think that we can improve on that should have really deliver the promise of what Dentsply Sirona should be. So look, specifically, hey, if you thought it was a three year restructuring, we're slightly ahead of where we thought we would be. I would just tell you that we're committed our management team is committed to as soon as we get done that restructuring, we're not stopping. We're, how do we continuously improve.</p><p><strong>John Kreger</strong> -- <em>William Blair -- Analyst</em></p><p>That's great. And then one last one. How is your implant portfolio performing, how it did in the second quarter? And are you rethinking that lineup at all?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Implants is we've been happy with our implant business. I would tell you, when you say the second quarter, John, it's an interesting challenge in terms of what language do you use. Implants did well relative, but versus prior year across the whole portfolio, was challenging. As we talk and think rethink about our portfolio, look, we think we've started to actually get our new products where we need to get them. Obviously, we've talked about our immediate load Astra EV product. And I think that's the first of what you'll see a pretty regular set of introductions over the next 18 months in our implant space that are going to really let us be competitive. The other thing that we've been doing with implants that doesn't get a lot of highlight is we have a business MIS that we had bought a couple of years back, which lets us play a little bit more aggressively in the value segment.</p><p>And as we've been rethinking how we approach our commercial go-to-market strategy across all of Dentsply Sirona including on implants, being able to integrate that and expand that beyond the base of what they used to operate in when we bought them has been beneficial there. So we feel that implants remains a significant growth opportunity for us. I would say that we're starting to get the portfolio where we need to get it. I'm extremely excited about what I think the new products in that space are going to be able to deliver for us over the next couple of years.</p><p><strong>John Kreger</strong> -- <em>William Blair -- Analyst</em></p><p>It sounds good. Thank you.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question is from John Block with Stifel. Please go ahead.</p><p><strong>Trevor</strong> -- <em>Stifel -- Analyst</em></p><p>This is Trevor [Phonetic] on for John. So I think you mentioned earlier that your patient tracking is saying that patient confidence has been continuing to go up recently. I'm wondering if there's any detail you can give there on just like how that's shaking out geographically? And if there's a read-through to potentially some of your July comments through that confidence level?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Yes. Sure. Thanks, Trevor. A couple of things. I mean, first, we're doing patient tracking across the entire globe. And again, we've seen consistent improvement around people likely to visit the dentist, and we measure it likely to visit in the next 30 days, the next quarter and whatnot. So we've been seeing consistent improvement across the board there. Interestingly, there's kind of a subgroup. People who have been to the dentist have had really positive experiences around how people whether it's adjusting waiting room or how they're addressing infection protocols. So we see that group is pretty positive. One of the things we were trying to watch as they were kind of the flare-ups in the U.S. and in particular geographies, whether there was going to be a drop-off in patient confidence, we didn't see that.</p><p>So look, and by the way, while most of the patient data is good, there is some reluctance on kind of a segment of the population to say, am I going to go back in the next month versus do I intend to go back to the dentist in the next six months. So there's a little bit of a lag there that we see, particularly in the U.S., but we don't see it elsewhere around the world. So patient tracking has been actually a good lead indicator. And again, we're seeing some good positive things there.</p><p><strong>Trevor</strong> -- <em>Stifel -- Analyst</em></p><p>Got it. And then just one more on DSOs. We've been hearing that DSOs in larger practice groups are tending to perform better in this environment. I'm just wondering if that's what you've been seeing. And if you think that some of the smaller, more fragmented practitioners could start to play catch-up as well?</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>To be honest, Trevor, we haven't seen a huge differentiation between the DSOs and the individual practices. The thing that we love about this market is that whether there's 600,000 dentists around the world and they're independent business owners. And they a lot of them are very, very inventive and creative about how they go after and make sure that they're reaching out to their patients and whatnot. So I look, do I think on the margin, if somebody was considering retiring in a year or two and COVID hit, do they sit there and say, now maybe the time that I accelerate that?</p><p>Yes, you might see a little bit of that. But we haven't seen a sharp change in the number of dental practices that we're doing business with. And we think that we haven't seen a drop-off in the aggregate number of dental practices in key regions post COVID. So when we're watching when we say things are 80% open, 90% open, 99%, we haven't seen the number of practices that we're measuring that against change.</p><p><strong>Trevor</strong> -- <em>Stifel -- Analyst</em></p><p>Great, thank you so much.</p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Trevor.</p><p><strong>Operator</strong></p><p>Thank you. And with that, we conclude our Q&A session for today. I would like to turn the call back to John Sweeney for his final remarks.</p><p><strong>John Sweeney</strong> -- <em>Vice President of Investor Relations</em></p><p>Thank you very much, everybody. We look forward to updating you as we move through the rest of the year. Have a good day.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 66 minutes</strong></p><h2>Call participants:</h2><p><strong>John Sweeney</strong> -- <em>Vice President of Investor Relations</em></p><p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p><p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p><p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p><p><strong>Steven Valiquette</strong> -- <em>Barclays -- Analyst</em></p><p><strong>Michael Cherny</strong> -- <em>Bank of America -- Analyst</em></p><p><strong>Jason Bednar</strong> -- <em>Piper Sandler -- Analyst</em></p><p><strong>Elizabeth Anderson</strong> -- <em>Evercore -- Analyst</em></p><p><strong>Steve Beuchaw</strong> -- <em>Wolfe Research -- Analyst</em></p><p><strong>John Kreger</strong> -- <em>William Blair -- Analyst</em></p><p><strong>Trevor</strong> -- <em>Stifel -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/xray">More XRAY analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than DENTSPLY SIRONA Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DDENTSPLY%2520SIRONA%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=3a5603a4-0430-4c92-a40e-ba040b683be9">ten best stocks</a></strong> for investors to buy right now… and DENTSPLY SIRONA Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DDENTSPLY%2520SIRONA%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=3a5603a4-0430-4c92-a40e-ba040b683be9" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-92947", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["XRAY"], "primary_tickers_companies": ["DENTSPLY SIRONA Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Dentsply International Inc (XRAY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 35, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-92947"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-92947", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["XRAY"], "primary_tickers_companies": ["DENTSPLY SIRONA Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Dentsply International Inc (XRAY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 35, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], XRAY earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Dentsply International Inc</strong> <span class="ticker" data-id="206212">(<a href="https://www.fool.com/quote/nasdaq/dentsply-sirona-inc/xray/">NASDAQ:XRAY</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:00 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the Dentsply Sirona Earnings conference call. [Operator Instructions] [Operator Instructions]. [Operator Instructions]</p>, <p>I would now hand the conference over to your speaker today, John Sweeney.</p>, <p><strong>John Sweeney</strong> -- <em>Vice President of Investor Relations</em></p>, <p>Thank you, operator, and good morning, everyone. Welcome to our second quarter 2020 earnings conference call. I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we make certain predictive statements that reflect our current views about the future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of those most important risk factors that could cause actual results to differ from our predictions.</p>, <p>And with that, I'd now like to turn the program over to Don Casey, Chief Executive Officer, Dentsply Sirona.</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Thank you, John, and thank all of you for joining us today. We hope that you and your families remain safe and healthy. To start the call, I would like to acknowledge two groups that deserve both our gratitude and recognition. The first is our customers. Throughout this pandemic, dentists and their staff have shown tremendous resilience, whether dealing with changing local regulations, adjusting to new safety protocols or finding new ways to help patients, dentists all over the world have adopted and innovated. Their commitment to their patients is inspiring. The second group is the employees of Dentsply Sirona. Over the last six months, they have been challenged in truly unprecedented ways. Throughout, they remain focused on serving our customers, creatively addressing new circumstances and continuing to make progress on our critical initiatives.</p>, <p>This highlights that the people of Dentsply Sirona and the culture we are building are truly our most important assets. I would like to thank all of them around the world for their extraordinary efforts. It is a privilege to lead such a committed and passionate group. Our call today will focus on four key areas: the first is to outline our second quarter results, the second is to provide some details on how our business has been performing as dentist offices reopen, the third area provides the steps that Dentsply Sirona is taking to position the company for the future, and finally, I will review the company's near-term priorities as we navigate the current environment. As expected, our second quarter results reflect the major changes in the market. The quarter began with significant governmental actions, resulting in the shutdown of dental practices and restrictions on patient traffic. The situation improved across the quarter with month-to-month improvements in terms of dentist offices opening and patients beginning to come back. Our revenue followed this trend.</p>, <p>Our team continues to track patient attitudes around returning to the dental office as well as the ongoing impact of additional infection control requirements on office capacity. Based on what we are seeing, we are optimistic that the recovery is well under way globally. Our results in the quarter also reflect significant actions the company took to address the difficult operating environment. These plans were built around employee safety, meeting the needs of the customer, enhancing the financial strength of the company and making continued progress on our key strategic initiatives. To date, we have seen good results around employee safety and have not seen any major disruptions across the organization. Despite challenges presented by the pandemic, the company has been able to reliably meet customer demand. Our commercial team showed excellent creativity in adapting to new circumstances, providing an extensive array of digital, clinical education and online marketing events.</p>, <p>These programs have been extremely well received. A comprehensive cost control program was executed during the second quarter, involving furloughs, short-work weeks, salary reductions and spending controls. These efforts contributed to the drop in SG&A expenses in the quarter. While the business has begun to restart, this program will remain in place until the trajectory of the recovery is better understood. Our supply chain has been disciplined around inventory, and there has been a real emphasis on protecting our cash flow. Finally, the company undertook a series of actions to bolster its liquidity and financial position. While there is a pressing need to manage the disruptions caused by the pandemic, our team is focused on positioning the company for the future. Since announcing a restructuring in late 2018, Dentsply Sirona has made significant progress against the goals we had laid out.</p>, <p>Our work on continuously challenging ourselves has shown there is still further opportunities to improve our performance. Therefore, today, we are announcing additional portfolio actions that expand on the original program. These include plans for exiting the traditional orthodontics business as well as parts of our analog lab business. I will discuss details later in the call. These steps, while difficult, allow the company to focus on higher growth and higher-margin digital areas where we believe Dentsply Sirona has strategic advantage. Moving to slide seven, where we summarize our 2Q 2020 results. Second quarter revenues were $491 million, down 50% on an organic basis due to the impact of the coronavirus. Adjusted operating income was negative. Non-GAAP EPS for the quarter was a loss of $0.18. Cash flow was actively managed in the second quarter, driving cash flow from operations of $175 million, which was up 21% compared to prior year.</p>, <p>I will now turn the call over to Jorge, who will review the quarterly results and provide an outlook.</p>, <p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Thank you, Don, and good morning, everyone. The second quarter was obviously a challenging one for the global economy and for many industries, including dental. On slide nine, we show our second quarter non-GAAP 2020 P&L. Starting with the top line. Organic sales were down 50% as compared to the prior year. In the U.S. and Europe, with some minor exceptions, dental practices limited their activity to emergency procedures in April and much of May and then began to reopen as we moved into June. As we shared on our last earnings call, we saw declines of 60% to 80% in April in certain geographies, with the U.S. been hit the hardest, but our revenue trends improved gradually each month, finishing down about 40% compared to prior year in June. We also saw a gradual improvement from the first to the last week in June. So it is clear that we're seeing a recovery, but have yet to get back to a normal level of sales.</p>, <p>Thank you, Don, and good morning, everyone. The second quarter was obviously a challenging one for the global economy and for many industries, including dental. On slide nine, we show our second quarter non-GAAP 2020 P&L. Starting with the top line. Organic sales were down 50% as compared to the prior year. In the U.S. and Europe, with some minor exceptions, dental practices limited their activity to emergency procedures in April and much of May and then began to reopen as we moved into June. As we shared on our last earnings call, we saw declines of 60% to 80% in April in certain geographies, with the U.S. been hit the hardest, but our revenue trends improved gradually each month, finishing down about 40% compared to prior year engine. We also saw a gradual improvement from the first to the last week in June. So it is clear that we're seeing a recovery, but have yet to get back to a normal level of sales.</p>, <p>Gross profit was $207 million or 42.1% of sales, down from 57.7% in the prior year quarter. As it is the case in solid and material reductions in volume, gross profit margin is impacted by the fixed cost base, which is difficult to address in the short term. Examples of this cost include depreciation, leases, maintenance of manufacturing and logistic facilities and costs related to ensuring compliance with high manufacturing standards. Gross profit margin was also impacted by higher-than-average inventory reserve expenses of approximately $17 million, primarily as a result of lower sales. SG&A of $249 million was down a substantial $132 million, which is approximately 35% lower as compared to prior year. During the quarter, we took decisive action to reduce our SG&A costs, resulting in the steep year-over-year decline. One area in SG&A that actually increased over last year was bad debt expense, which saw an uptick of $15 million year-over-year. These significant P&L fluctuations were driven by the ongoing market disruptions and generated an operating loss of $42 million in the quarter.</p>, <p>Last year, our operating profit was $202 million in the second quarter. Interest and other increased by $9.9 million versus last year, driven by the issuance of $750 million in long-term debt, the addition of new credit facilities and the termination of certain FX hedges. The non-GAAP tax rate was 27.5% in the quarter, up from 25.3% in the prior year, a function of the change in the estimated amount of pre-tax income and a change to the expected income mix. Non-GAAP EPS was a loss of $0.18 as compared to non-GAAP EPS of $0.66 in the prior year quarter. Moving on to slide 10, where we review our Consumables segment performance. Reported sales were $187 million, down 58.6% and down 57.7% on an organic sales basis. All of our product groups and consumables were negatively impacted by the temporary closure of dental offices. While our Consumable sales show a steeper decline than our T&E sales, both segments actually performed relatively similar from an end customer perspective. Let me explain the two factors that contributed to the larger decline in our Consumable sales. First, there's a difference in order lead times. Consumable deliveries tend to match demand almost simultaneously, up or down.</p>, <p>Due to the nature of the products, T&E has a longer order lead time, and therefore, deliveries continued over an extended period even after dental procedure volume has slowed down at the beginning of the quarter. The second factor impacting Consumables more than T&E is the fluctuations in inventory levels in the biller network. During severe market conditions, it is typical for companies to preserve cash by lowering inventory balances as much as possible. We saw a steeper decline in Consumables network inventory. So when you account for all of these variables, we believe both segments declined at relatively similar levels. Consumables operating margin was negative 9.4% as compared to 27% in the second quarter of 2019. There are two primary reasons for the decline in Consumables margins. The first reason is that the Consumables segment experienced a steeper fall off in sales compared to T&E. Second, the Consumables business is more plant and infrastructure dependent and requires more volume to run efficiently. We have more manufacturing plants dedicated to Consumables.</p>, <p>And this means a higher fixed infrastructure cost for this segment. This is why we have been taking steps to consolidate our footprint and reduce our fixed cost base. In the past couple of years, we have completed several portfolio shaping actions, including FONA, 1-800-DENTIST, SICAT and the Surgical business of Wellspect. In addition, the two portfolio shaping activities we are announcing today will further consolidate our manufacturing footprint and will increase productivity and decrease fixed costs. Moving on to slide 11, where we highlight our Technologies and Equipment segment. Net sales were $304 million, down 45.6% as compared to prior year. Organic sales for the quarter were down 43.6% versus the prior year. Equipment and instruments, digital dentistry and implants all experienced similar levels of decline in the quarter, driven by the lower sales resulting from COVID-19. Our Healthcare business saw a slight decline in Q2 after posting strong Q1 as Healthcare systems were getting ready for the first major waves of COVID-19. Technologies and Equipment operating income margin was negative 1.3% versus 17.2% in the prior year quarter.</p>, <p>On slide 12, we show our business performance for the second quarter on a regional basis. U.S. sales of $131 million declined 60.3% compared to the prior year. This represents a decline in organic sales of 60%. In the U.S. market, Consumables declined slightly more than T&E. European sales were $215 million, down 49% compared to the prior year. Organic sales were down 46.9% versus last year. In Europe, Consumable sales declined more than Technologies and Equipment on a percentage basis. Rest of the World sales were $144 million, down 44%, and organic sales were down 41.9%. Rest of the World Consumables declined more than T&E sales in the same in the second quarter. On slide 13, we show our cash flow performance. In the second quarter of 2020, cash flow from operations was $175 million as compared to $145 million in the prior year quarter. This strong cash flow generation was the result of a disciplined approach to curtailing expenses and reducing working capital without sacrificing key strategic investments. Working capital generated a significant boost in liquidity in the quarter. We were successful in achieving meaningful reductions in accounts receivables and inventory balances.</p>, <p>We expect some of this cash will be injected back into working capital as demand and production volumes climb back up to normal levels. In terms of capital expenditures, we spent $13 million in the second quarter of 2020, down from $27 million last year. Free cash flow was a strong $162 million in the quarter, up 37% as compared to $118 million in the prior year. In the quarter, we paid $22 million in dividends for a total of $184 million returned to shareholders through dividends and share repurchases in the first six months of 2020. At the end of June 2020, we had a strong liquidity available, comprising $1.1 billion of cash and $1.2 billion of committed credit facilities. The efforts we made during the second quarter ensure that we have ample liquidity available to invest and grow the company as the economy recovers. On slide 14, I'd like to talk about the significant actions we took to reduce operating expenses in the second quarter of 2020. Our efforts to reduce costs in the quarter were multi-faceted. All levels and functions of the enterprise contributed to significant compensation savings.</p>, <p>Each part of the organization up to and including the Board of Directors and executive levels have stepped up and helped in these efforts. As of today, most of our employees who were impacted by these measures have returned to work or to normal pay levels. The next largest area for cost reductions was discretionary commercial spend such as advertising and promotions. It was logical to reduce this spend when dental offices were closed, and the returns could not be realized. We also achieved significant savings from reductions in professional services and, of course, travel expenses. Together, all of these actions delivered a reduction in SG&A of 35% versus last year. With respect to business trends for the remainder of the year, I'd like to make a few comments. First, let me start with current volume trends. All regions recovered from their low point in April and improved by 20 to 40% points by the end of the quarter. Additionally, in June, the last week of the month was significantly better than the first week. And we are pleased to note that the positive momentum continues into July, with July sales approaching or surpassing 2019 levels, depending on the region and product groups.</p>, <p>There are still some gating factors in place, including the availability of personal protection equipment, new infection prevention protocols reducing office capacity and overlapping regulations, all of which impact the shape of the recovery. Together, these factors point to a gradual as opposed to a sudden snapback in demand. Let me give you more details from a geographical perspective. In the U.S., virtually all dental offices are now open, and we continue to see signs of improvement, with July volume trending better than what we saw in June. In Europe, we also saw July trends improving sequentially. With regards to the Rest of the World, in APAC, some of the markets turned positive in July, with good traction in China and Japan and some lingering concerns in Australia. Latin America remains a challenging market as COVID-19 continues to impact our business in Brazil and other countries in the region. Moving forward to the second half of the year. As we announced today, we are accelerating actions to fund growth areas and improve efficiencies. As we did in Q2, we will continue to drive a disciplined resource allocation process that emphasize return on investment and sustainability of our growth initiatives.</p>, <p>With that, I will now turn the call back to Don.</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Thanks, Jorge. And moving to slide 17. As I mentioned earlier in the call, in November 2018, we put a plan in place to accelerate growth, improve margins and simplify the organization. Our results through 2019 and the first quarter of 2020 show significant progress. The execution highlights of our plan include: accelerating growth behind new products, including Primescan and Primemill as well as other new products in our Consumable portfolio. The pipeline of future new products has also been enhanced. The company has made major investments in critical areas like our digital product portfolios, digital commercial capabilities and growth priorities like our SureSmile clear aligner business. Dentsply Sirona has implemented a new organizational structure, centralizing supply chain and other functions, while creating a unified commercial structure. There have been major initiatives designed to transform the finance, HR and IT areas.</p>, <p>Further, we've undertaken multiple portfolio-shaping activities, including the ones announced today. The restructuring plan is a multiyear initiative. As part of that, the organization has embraced the need to continue challenging ourselves to go beyond the original plan and deliver better results. That work has shown there are significant opportunities in both the near term and longer term. Moving now to slide 18. Over the last several quarters, as Jorge mentioned, we have exited several underperforming businesses. These reduce our cost and complexity, while serving to enhance our growth and margins. The team continually reviews all our business against the framework around future growth opportunities as well as strategic fit. In the area of orthodontics, we believe that the clear aligner space is an attractive opportunity for Dentsply Sirona. SureSmile now offers a comprehensive digital treatment plan that positions the company well in this rapidly growing market.</p>, <p>Going forward, we will focus all our efforts in the ortho space on the clear aligner area. We believe this offers the opportunity to grow, innovate and take advantage of many of Dentsply Sirona's unique strategic advantages, including our large CEREC user community. As a result, we are exiting the traditional orthodontics business, which includes brackets, bands, tubes and wires. The traditional orthodontic business is a component of the Technology and Equipment segment and had net sales of approximately $132 million in 2019. Likewise, in our lab business, there is a clear opportunity to focus on the digital space, which is showing good growth rates and solid margins. It's a place where innovation will be rewarded. Based on our analysis, it is critical to focus all our lab resources in the digital area going forward. As such, we are announcing plans to exit the analog portion of the laboratory business that manufacture removable dentures and related products.</p>, <p>This business is a component of the Consumables segment and had net sales of approximately $44 million in 2019. Together, the portfolio-shaping initiatives and additional actions are expected to result in the closure of several facilities and an incremental reduction of approximately 6% to 7% of the company's workforce by the end of 2021. The ongoing execution of the restructuring will enhance Dentsply Sirona's continued efforts to grow revenues, expand our margins and simplify the organization. Slide 19 lists our priorities for the back half of 2020. They include executing on our comprehensive restructuring plan, pursuing our growth initiatives aggressively and meeting our financial objectives. In conclusion, the COVID pandemic will continue to impact our industry and our company for the foreseeable future. Current trends are positive and a reason for optimism, but we will need to continue to adapt to the circumstances as they change.</p>, <p>We believe we have a comprehensive plan for both the short term and longer term to deliver value for our customers and our shareholders. Further, the company has maintained its focus on our priorities around growth, margin expansion and simplifying the business. Our financial strength, broad portfolio and global reach are position us well to succeed and win in the dental industry. It's hard to know what the new normal is or when it will arrive, but our internal theme is that teeth do not heal themselves. Our team is optimistic about the fundamentals of the industry, and we embrace the current challenges and are confident in our strategy, our customers and our team. Thank you.</p>, <p>And with that, we'll take questions.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-25872">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-25872');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Our first question is from Jeff Johnson with Baird. Please go ahead.</p>, <p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p>, <p>Thank you, good morning guys. Can you hear me OK? I think I was on mute there.</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Yes. We got you Jeff. Yes.</p>, <p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p>, <p>Great. So Don, I think I just want to start with the July comments. I really want to understand maybe message that you want to have out there. It sounds like you could make the argument that July was getting back toward flattish year-over-year levels according to what Jorge said. But how much of that might be sell-in that was recovering off some sell-in issues earlier in the quarter or earlier in 2Q?</p>, <p>Does your sell-in is it starting to match kind of the sell-out at this point? And again, I know you're not guiding, but for 3Q, should we think July maybe isn't sustainable as you get into August and September, if there is some backlog helping in that July number?</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Yes. Thanks, Jeff. Look, I think Jorge said it clearly in the prepared remarks, as we're looking at July, there's places that have we're seeing good progress. In some cases, it's actually exceeding 2019. Your specific question about how much of that is inventory rebuild, it's hard to see exactly. There's a couple of things we're looking at. And that's one of the reasons we're not being OK, let's just go project July into August, September and later in the fourth quarter. The things we're looking at is patient volume, and we've seen that as good. Office capacity, we see office capacity kind of improving. Our patient tracking is telling us that confidence in the dentist office continues to go up. But there is a pocket that's going to be reluctant, at least in the U.S. to go back for a little while. And what that, in our mind, means that, OK, look, if we're getting capacity in the dentist office back to close to normal, that's going to take a little bit of time. I think we're working through a bolus of patients right now.</p>, <p>And then I think from an inventory perspective, our dealers and the dentist office ultimately are working through the fact that when the pandemic started, I think people hit the brakes pretty hard on stuff that's ordered almost every day. And in our mind, that's kind of the consumables space. And you could see, Jeff, the difference between our Consumable and the T&E side, and we believe that is a lot to do with, OK, we don't know how long the office is going to be closed, we're going to stop building inventory on the daily stuff. And as a result, there may be some build back here. But look, in my summary, I was pretty clear on saying, "Hey, look, we we're happy that we saw consecutive month-to-month sequential improvement in overall demand." We're seeing that at the retail level. We're happy that July has continued that trend, and we're happy to see that in some cases, we're actually tracking better than 2019.</p>, <p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p>, <p>Understood. That's helpful. And just as a follow-up, thinking about 2021 conceptually, we all know what the ADA is saying about high likelihood that dental consumption and dental industrywide revenues are down relative to 2019 level. I don't think anybody would really argue with that, at least looking at things right now. But with some of the extra restructuring efforts you're taking now.</p>, <p>Some of the tailwinds from the restructuring that we're probably still continuing from the past plan, how do you think about margins, especially next year? Can they get back to 2019 levels with revenue that at least is approaching 2019 levels next year? Or is there a lag in kind of the margin recovery relative to how we think about revenues next year?</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Yes, Jeff, it's early for us to really forecast 2021. I would tell you the steps we took around the restructuring, though, reflect our interest in sitting there saying, "Hey, look, we need to get back on the margin progression." I mean, we've been saying since November 2018, how do we grow, how do we get our margins improving. And I think we have to take organizational steps to do it. I think the results here show you that we think we've made some good progress. I mean, basically, through the first quarter of 2020, we were tracking on a margin basis. And what we've seen, obviously, our margin is revenue dependent. And look, if revenue is down 20% in 2021, that's obviously going to have an impact on the business. We don't think that's going to happen. But we are taking specific steps now to sit there and say, irregardless of whether the category is up 2% or 3% or down 2% or 3% or up 10%, down 10%, we want to be taking steps toward margin accretion.</p>, <p>And as we get out of the traditional ortho business, we got out of the analog lab business, those are all part of the ongoing restructuring designed to help us really take charge of our ability to drive margin accretion going forward. And I'm not going to say it's going to be revenue independent, but we think we can take steps at a certain revenue base that we're really going to be able to drive margin. And we were very clear I joke with John Sweeney occasionally that we picked our revenue targets to match the years just to make sure that we could always communicate it. So we've always said 22 in 2022. And internally, what we're trying to focus on is, look, we think 22 is attainable. We don't know if it's going to happen exactly on the trajectory based on what we're seeing with COVID. Is COVID and the knock-on effects of that, is that a six month issue, is it a nine month, 12-month issue, but we want to be marching back toward that target. It just may take us a little bit longer to get there.</p>, <p><strong>Jeff Johnson</strong> -- <em>Baird -- Analyst</em></p>, <p>Thank you.</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Thank you.</p>, <p><strong>Operator</strong></p>, <p>And our next question comes from Tycho Peterson with JPMorgan. Please go ahead.</p>, <p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p>, <p>Hey, are you able to talk about how much of the Consumable pressure in the quarter was inventory destocking versus slower orders? And how much incremental risk is there going forward with distributors around potential additional destocking?</p>, <p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Tycho, this is Jorge. It's hard to give any precise number. But as Don just indicated, in the case of Consumables, there is a the order lead time is very short. And so when the pandemic hit customers and dealers, and in general, in the marketplace, there was a reaction to manage inventories very, very closely. And when we look at the data of retail sales and our sales up, there are a lot of indications that show that there was a reduction in the inventory levels that we historically or typically carry in the network. So there was an element of that. And when that comes back to the typical levels it is hard to project, some of that may be happening, as Don indicated.</p>, <p>But I don't think that is something that for us is going to be meaningful from a long-term perspective. Listen, at the end of the day, we always want to make sure that our sales match retail sales. That is our key objective. That's how we make money. There will be always small fluctuations in the network. So I think given the magnitude of the changes that we experienced in the second quarter as a result of lower revenues and the uncertainty that we still have in many places, I think that is that noise is not actually meaningful in terms of explaining our performance and our trajectory over the next several months.</p>, <p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p>, <p>Okay. And then, Don, on the portfolio reshaping, I'm curious, the decision to exit ortho. I always thought part of the picture on the clear aligner was the ability to go in and do hybrid cases and leverage that strong ortho channel as you push out SureSmile. So I'm curious if there is risk of dissynergies here? And how do you think about that?</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Yes. Thanks, Tycho. We're actually there's a component of the wire bending aspect of SureSmile that we're keeping. What when we say how we kind of delineate traditional ortho, it's kind of the brackets bands that would go straight up on an orthodontist using orthodontia. We believe hybrid is meaningful. We believe that it's a differentiator for SureSmile. So we're actually keeping those components. So that piece of traditional ortho and the piece that actually came with the OraMetrix acquisition is going to stay with that. And then what we're seeing is where we're getting real traction. SureSmile tends to be right now focused around our CEREC base.</p>, <p>We kind of made that shift basically in October of last year, and that's part of the One DS program, and we're seeing good traction there. So as we look going forward, we didn't feel that there were going to be dissynergies associated with getting out of traditional orthodontia treatment among the orthodontist group. So as we focus on growing in the future, we tend to think, all right, how do we take care of how do we take advantage of our digital assets and how do we really look at expanding in places that are not necessarily tied to kind of the traditional orthodontia model.</p>, <p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p>, <p>Okay. And then just lastly, any thoughts on just the capital equipment appetite as we think about the back half of the year and then think about Primescan and Primemill? Can you just talk on to what degree you think there could be pent-up demand? And any need on your part to be a little bit more flexible in terms of financing or pricing potentially?</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>It's been interesting, Tycho. Even before the pandemic hit, we were really beginning to shift to one our theory of One Visit Dentistry. And with Primemill and the speed of Primemill, it really made that a reality. I mean you can get patients in and out with a single unit crown in an hour plus. So we had made that shift. And it was interesting in April, when everything went down, we really shifted to a bunch of digital whether it was product demonstrations or kind of taking people through what One Visit Dentistry really means. We got a pretty good reception. So what we've seen to date, and you've actually seen the results that there's a pretty good appetite in our mind for Technology and Equipment. Now whether it's spread across?</p>, <p>Are we going to see treatment centers? And are we going to see imaging? Not sure. But we feel very good about Primescan and Primemill and the opportunity for dentists who are basically going to be dealing with a patient population that may be a little bit, "Hey, do I want to go to the dentist three times in during the pandemic to get a crown fixed or can I get that done one time." You're also seeing a lot of dentists that we've been talking to and we've been seeing a fair amount of success with saying, "Hey, look, I got to change how I practice and they used the kind of the downtime during the pandemic to think through that." So we're we feel good about where we are from a Technology and Equipment space in the back half. And in a large part, it's due to the, first, the new products we pushed out, but also the change in messaging and how we're pitching these products.</p>, <p>So ultimately and look, we're working with our dealer partners globally right now to make sure that we're helping dentists access this material. But we're do I see a whole bunch of pricing pressure and crazy financing options coming on our Technology and Equipment? No.</p>, <p><strong>Tycho Peterson</strong> -- <em>JPMorgan -- Analyst]</em></p>, <p>Okay, thank you.</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Thanks, Tycho.</p>, <p><strong>Operator</strong></p>, <p>Thank you. And our next question comes from Steven Valiquette with Barclays. Please go ahead.</p>, <p><strong>Steven Valiquette</strong> -- <em>Barclays -- Analyst</em></p>, <p>Thanks, good morning everybody. A couple of quick questions for you. First, your comment around July being a fairly flat year-over-year on a global basis is obviously pretty positive. I know you don't want to give any specific guidance, but just kind of eyeball on the street consensus estimates for the third quarter. They call of revenues to be down some 20% to 25% year-over-year.</p>, <p>So I'm just wondering based on what you're seeing in July and barring any other major changes in the landscape, is that a number that seems like maybe that's too conservative on the revenue outlook as far as where consensus is? Just curious to get your thoughts around that.</p>, <p><strong>Jorge Gomez</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Jorge here. Listen, it is early for us to be able to extrapolate from the July numbers. And as you can appreciate, there is a lot of different data points coming from different regions. And there are some markets that are doing much better in terms of the number of offices that are open, markets that are good from a volume perspective. We still have lingering concerns in places like Australia, parts of Latin America, and there are some spots in Europe that are also still challenging. So it is very hard to make a judgment with respect to those numbers.</p>, <p>I think what we are we're really encouraged by the fact that sequentially, the last three months have been moving in the right direction. But from a planning perspective, internally, we're trying to we continue to work with scenario planning. We are preparing the company for a multiple set of outcomes in the next few months and quarters, I think it is a prudent thing to do. So hard to tell you if that number is right or not.</p>, <p><strong>Steven Valiquette</strong> -- <em>Barclays -- Analyst</em></p>, <p>Okay. That's helpful. One other quick clarification question. On the exiting of the traditional orthodontics and parts of the analog lab business, are these businesses that could be monetized through asset sales? Or are these just full shutdowns? Maybe just give us a little more color on the decision tree on shutdown versus asset sale?</p>, <p><strong>Donald Casey</strong> -- <em>Chief Executive Officer</em></p>, <p>Yes, Steve. As we look at it right now, we're making the announcement to get it done. Obviously, we'll look to dispose the assets in a way that is most beneficial to the company. If there's some asset sales, we'll certainly look at it. If it's a full shutdown, we gave you guys the numbers based on the worst-case scenario. And obviously, we're going to work to improve that. But again, the process, because we mentioned in the prepared remarks, it's multiple plants in multiple locations.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-92947", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["XRAY"], "primary_tickers_companies": ["DENTSPLY SIRONA Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Dentsply International Inc (XRAY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 35, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-92947"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-92947", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["XRAY"], "primary_tickers_companies": ["DENTSPLY SIRONA Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Dentsply International Inc (XRAY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 35, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | XRAY earnings call for the period ending June 30, 2020. | I would now hand the conference over to your speaker today, John Sweeney.\n Thank you, operator, and good morning, everyone. Welcome to our second quarter 2020 earnings conference call. I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we make certain predictive statements that reflect our current views about the future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of those most important risk factors that could cause actual results to differ from our predictions.\n And with that, I'd now like to turn the program over to Don Casey, Chief Executive Officer, Dentsply Sirona.\n Thank you, John, and thank all of you for joining us today. We hope that you and your families remain safe and healthy. To start the call, I would like to acknowledge two groups that deserve both our gratitude and recognition. The first is our customers. Throughout this pandemic, dentists and their staff have shown tremendous resilience, whether dealing with changing local regulations, adjusting to new safety protocols or finding new ways to help patients, dentists all over the world have adopted and innovated. Their commitment to their patients is inspiring. The second group is the employees of Dentsply Sirona. Over the last six months, they have been challenged in truly unprecedented ways. Throughout, they remain focused on serving our customers, creatively addressing new circumstances and continuing to make progress on our critical initiatives.\n This highlights that the people of Dentsply Sirona and the culture we are building are truly our most important assets. I would like to thank all of them around the world for their extraordinary efforts. It is a privilege to lead such a committed and passionate group. Our call today will focus on four key areas: the first is to outline our second quarter results, the second is to provide some details on how our business has been performing as dentist offices reopen, the third area provides the steps that Dentsply Sirona is taking to position the company for the future, and finally, I will review the company's near-term priorities as we navigate the current environment. As expected, our second quarter results reflect the major changes in the market. The quarter began with significant governmental actions, resulting in the shutdown of dental practices and restrictions on patient traffic. The situation improved across the quarter with month-to-month improvements in terms of dentist offices opening and patients beginning to come back. Our revenue followed this trend.\n Our team continues to track patient attitudes around returning to the dental office as well as the ongoing impact of additional infection control requirements on office capacity. Based on what we are seeing, we are optimistic that the recovery is well under way globally. Our results in the quarter also reflect significant actions the company took to address the difficult operating environment. These plans were built around employee safety, meeting the needs of the customer, enhancing the financial strength of the company and making continued progress on our key strategic initiatives. To date, we have seen good results around employee safety and have not seen any major disruptions across the organization. Despite challenges presented by the pandemic, the company has been able to reliably meet customer demand. Our commercial team showed excellent creativity in adapting to new circumstances, providing an extensive array of digital, clinical education and online marketing events.\n These programs have been extremely well received. A comprehensive cost control program was executed during the second quarter, involving furloughs, short-work weeks, salary reductions and spending controls. These efforts contributed to the drop in SG&A expenses in the quarter. While the business has begun to restart, this program will remain in place until the trajectory of the recovery is better understood. Our supply chain has been disciplined around inventory, and there has been a real emphasis on protecting our cash flow. Finally, the company undertook a series of actions to bolster its liquidity and financial position. While there is a pressing need to manage the disruptions caused by the pandemic, our team is focused on positioning the company for the future. Since announcing a restructuring in late 2018, Dentsply Sirona has made significant progress against the goals we had laid out.\n Our work on continuously challenging ourselves has shown there is still further opportunities to improve our performance. Therefore, today, we are announcing additional portfolio actions that expand on the original program. These include plans for exiting the traditional orthodontics business as well as parts of our analog lab business. I will discuss details later in the call. These steps, while difficult, allow the company to focus on higher growth and higher-margin digital areas where we believe Dentsply Sirona has strategic advantage. Moving to slide seven, where we summarize our 2Q 2020 results. Second quarter revenues were $491 million, down 50% on an organic basis due to the impact of the coronavirus. Adjusted operating income was negative. Non-GAAP EPS for the quarter was a loss of $0.18. Cash flow was actively managed in the second quarter, driving cash flow from operations of $175 million, which was up 21% compared to prior year.\n I will now turn the call over to Jorge, who will review the quarterly results and provide an outlook.\n Thank you, Don, and good morning, everyone. The second quarter was obviously a challenging one for the global economy and for many industries, including dental. On slide nine, we show our second quarter non-GAAP 2020 P&L. Starting with the top line. Organic sales were down 50% as compared to the prior year. In the U.S. and Europe, with some minor exceptions, dental practices limited their activity to emergency procedures in April and much of May and then began to reopen as we moved into June. As we shared on our last earnings call, we saw declines of 60% to 80% in April in certain geographies, with the U.S. been hit the hardest, but our revenue trends improved gradually each month, finishing down about 40% compared to prior year in June. We also saw a gradual improvement from the first to the last week in June. So it is clear that we're seeing a recovery, but have yet to get back to a normal level of sales.\n Thank you, Don, and good morning, everyone. The second quarter was obviously a challenging one for the global economy and for many industries, including dental. On slide nine, we show our second quarter non-GAAP 2020 P&L. Starting with the top line. Organic sales were down 50% as compared to the prior year. In the U.S. and Europe, with some minor exceptions, dental practices limited their activity to emergency procedures in April and much of May and then began to reopen as we moved into June. As we shared on our last earnings call, we saw declines of 60% to 80% in April in certain geographies, with the U.S. been hit the hardest, but our revenue trends improved gradually each month, finishing down about 40% compared to prior year engine. We also saw a gradual improvement from the first to the last week in June. So it is clear that we're seeing a recovery, but have yet to get back to a normal level of sales.\n Gross profit was $207 million or 42.1% of sales, down from 57.7% in the prior year quarter. As it is the case in solid and material reductions in volume, gross profit margin is impacted by the fixed cost base, which is difficult to address in the short term. Examples of this cost include depreciation, leases, maintenance of manufacturing and logistic facilities and costs related to ensuring compliance with high manufacturing standards. Gross profit margin was also impacted by higher-than-average inventory reserve expenses of approximately $17 million, primarily as a result of lower sales. SG&A of $249 million was down a substantial $132 million, which is approximately 35% lower as compared to prior year. During the quarter, we took decisive action to reduce our SG&A costs, resulting in the steep year-over-year decline. One area in SG&A that actually increased over last year was bad debt expense, which saw an uptick of $15 million year-over-year. These significant P&L fluctuations were driven by the ongoing market disruptions and generated an operating loss of $42 million in the quarter.\n Last year, our operating profit was $202 million in the second quarter. Interest and other increased by $9.9 million versus last year, driven by the issuance of $750 million in long-term debt, the addition of new credit facilities and the termination of certain FX hedges. The non-GAAP tax rate was 27.5% in the quarter, up from 25.3% in the prior year, a function of the change in the estimated amount of pre-tax income and a change to the expected income mix. Non-GAAP EPS was a loss of $0.18 as compared to non-GAAP EPS of $0.66 in the prior year quarter. Moving on to slide 10, where we review our Consumables segment performance. Reported sales were $187 million, down 58.6% and down 57.7% on an organic sales basis. All of our product groups and consumables were negatively impacted by the temporary closure of dental offices. While our Consumable sales show a steeper decline than our T&E sales, both segments actually performed relatively similar from an end customer perspective. Let me explain the two factors that contributed to the larger decline in our Consumable sales. First, there's a difference in order lead times. Consumable deliveries tend to match demand almost simultaneously, up or down.\n Due to the nature of the products, T&E has a longer order lead time, and therefore, deliveries continued over an extended period even after dental procedure volume has slowed down at the beginning of the quarter. The second factor impacting Consumables more than T&E is the fluctuations in inventory levels in the biller network. During severe market conditions, it is typical for companies to preserve cash by lowering inventory balances as much as possible. We saw a steeper decline in Consumables network inventory. So when you account for all of these variables, we believe both segments declined at relatively similar levels. Consumables operating margin was negative 9.4% as compared to 27% in the second quarter of 2019. There are two primary reasons for the decline in Consumables margins. The first reason is that the Consumables segment experienced a steeper fall off in sales compared to T&E. Second, the Consumables business is more plant and infrastructure dependent and requires more volume to run efficiently. We have more manufacturing plants dedicated to Consumables.\n And this means a higher fixed infrastructure cost for this segment. This is why we have been taking steps to consolidate our footprint and reduce our fixed cost base. In the past couple of years, we have completed several portfolio shaping actions, including FONA, 1-800-DENTIST, SICAT and the Surgical business of Wellspect. In addition, the two portfolio shaping activities we are announcing today will further consolidate our manufacturing footprint and will increase productivity and decrease fixed costs. Moving on to slide 11, where we highlight our Technologies and Equipment segment. Net sales were $304 million, down 45.6% as compared to prior year. Organic sales for the quarter were down 43.6% versus the prior year. Equipment and instruments, digital dentistry and implants all experienced similar levels of decline in the quarter, driven by the lower sales resulting from COVID-19. Our Healthcare business saw a slight decline in Q2 after posting strong Q1 as Healthcare systems were getting ready for the first major waves of COVID-19. Technologies and Equipment operating income margin was negative 1.3% versus 17.2% in the prior year quarter.\n On slide 12, we show our business performance for the second quarter on a regional basis. U.S. sales of $131 million declined 60.3% compared to the prior year. This represents a decline in organic sales of 60%. In the U.S. market, Consumables declined slightly more than T&E. European sales were $215 million, down 49% compared to the prior year. Organic sales were down 46.9% versus last year. In Europe, Consumable sales declined more than Technologies and Equipment on a percentage basis. Rest of the World sales were $144 million, down 44%, and organic sales were down 41.9%. Rest of the World Consumables declined more than T&E sales in the same in the second quarter. On slide 13, we show our cash flow performance. In the second quarter of 2020, cash flow from operations was $175 million as compared to $145 million in the prior year quarter. This strong cash flow generation was the result of a disciplined approach to curtailing expenses and reducing working capital without sacrificing key strategic investments. Working capital generated a significant boost in liquidity in the quarter. We were successful in achieving meaningful reductions in accounts receivables and inventory balances.\n We expect some of this cash will be injected back into working capital as demand and production volumes climb back up to normal levels. In terms of capital expenditures, we spent $13 million in the second quarter of 2020, down from $27 million last year. Free cash flow was a strong $162 million in the quarter, up 37% as compared to $118 million in the prior year. In the quarter, we paid $22 million in dividends for a total of $184 million returned to shareholders through dividends and share repurchases in the first six months of 2020. At the end of June 2020, we had a strong liquidity available, comprising $1.1 billion of cash and $1.2 billion of committed credit facilities. The efforts we made during the second quarter ensure that we have ample liquidity available to invest and grow the company as the economy recovers. On slide 14, I'd like to talk about the significant actions we took to reduce operating expenses in the second quarter of 2020. Our efforts to reduce costs in the quarter were multi-faceted. All levels and functions of the enterprise contributed to significant compensation savings.\n Each part of the organization up to and including the Board of Directors and executive levels have stepped up and helped in these efforts. As of today, most of our employees who were impacted by these measures have returned to work or to normal pay levels. The next largest area for cost reductions was discretionary commercial spend such as advertising and promotions. It was logical to reduce this spend when dental offices were closed, and the returns could not be realized. We also achieved significant savings from reductions in professional services and, of course, travel expenses. Together, all of these actions delivered a reduction in SG&A of 35% versus last year. With respect to business trends for the remainder of the year, I'd like to make a few comments. First, let me start with current volume trends. All regions recovered from their low point in April and improved by 20 to 40% points by the end of the quarter. Additionally, in June, the last week of the month was significantly better than the first week. And we are pleased to note that the positive momentum continues into July, with July sales approaching or surpassing 2019 levels, depending on the region and product groups.\n There are still some gating factors in place, including the availability of personal protection equipment, new infection prevention protocols reducing office capacity and overlapping regulations, all of which impact the shape of the recovery. Together, these factors point to a gradual as opposed to a sudden snapback in demand. Let me give you more details from a geographical perspective. In the U.S., virtually all dental offices are now open, and we continue to see signs of improvement, with July volume trending better than what we saw in June. In Europe, we also saw July trends improving sequentially. With regards to the Rest of the World, in APAC, some of the markets turned positive in July, with good traction in China and Japan and some lingering concerns in Australia. Latin America remains a challenging market as COVID-19 continues to impact our business in Brazil and other countries in the region. Moving forward to the second half of the year. As we announced today, we are accelerating actions to fund growth areas and improve efficiencies. As we did in Q2, we will continue to drive a disciplined resource allocation process that emphasize return on investment and sustainability of our growth initiatives.\n With that, I will now turn the call back to Don.\n Thanks, Jorge. And moving to slide 17. As I mentioned earlier in the call, in November 2018, we put a plan in place to accelerate growth, improve margins and simplify the organization. Our results through 2019 and the first quarter of 2020 show significant progress. The execution highlights of our plan include: accelerating growth behind new products, including Primescan and Primemill as well as other new products in our Consumable portfolio. The pipeline of future new products has also been enhanced. The company has made major investments in critical areas like our digital product portfolios, digital commercial capabilities and growth priorities like our SureSmile clear aligner business. Dentsply Sirona has implemented a new organizational structure, centralizing supply chain and other functions, while creating a unified commercial structure. There have been major initiatives designed to transform the finance, HR and IT areas.\n Further, we've undertaken multiple portfolio-shaping activities, including the ones announced today. The restructuring plan is a multiyear initiative. As part of that, the organization has embraced the need to continue challenging ourselves to go beyond the original plan and deliver better results. That work has shown there are significant opportunities in both the near term and longer term. Moving now to slide 18. Over the last several quarters, as Jorge mentioned, we have exited several underperforming businesses. These reduce our cost and complexity, while serving to enhance our growth and margins. The team continually reviews all our business against the framework around future growth opportunities as well as strategic fit. In the area of orthodontics, we believe that the clear aligner space is an attractive opportunity for Dentsply Sirona. SureSmile now offers a comprehensive digital treatment plan that positions the company well in this rapidly growing market.\n Going forward, we will focus all our efforts in the ortho space on the clear aligner area. We believe this offers the opportunity to grow, innovate and take advantage of many of Dentsply Sirona's unique strategic advantages, including our large CEREC user community. As a result, we are exiting the traditional orthodontics business, which includes brackets, bands, tubes and wires. The traditional orthodontic business is a component of the Technology and Equipment segment and had net sales of approximately $132 million in 2019. Likewise, in our lab business, there is a clear opportunity to focus on the digital space, which is showing good growth rates and solid margins. It's a place where innovation will be rewarded. Based on our analysis, it is critical to focus all our lab resources in the digital area going forward. As such, we are announcing plans to exit the analog portion of the laboratory business that manufacture removable dentures and related products.\n This business is a component of the Consumables segment and had net sales of approximately $44 million in 2019. Together, the portfolio-shaping initiatives and additional actions are expected to result in the closure of several facilities and an incremental reduction of approximately 6% to 7% of the company's workforce by the end of 2021. The ongoing execution of the restructuring will enhance Dentsply Sirona's continued efforts to grow revenues, expand our margins and simplify the organization. Slide 19 lists our priorities for the back half of 2020. They include executing on our comprehensive restructuring plan, pursuing our growth initiatives aggressively and meeting our financial objectives. In conclusion, the COVID pandemic will continue to impact our industry and our company for the foreseeable future. Current trends are positive and a reason for optimism, but we will need to continue to adapt to the circumstances as they change.\n We believe we have a comprehensive plan for both the short term and longer term to deliver value for our customers and our shareholders. Further, the company has maintained its focus on our priorities around growth, margin expansion and simplifying the business. Our financial strength, broad portfolio and global reach are position us well to succeed and win in the dental industry. It's hard to know what the new normal is or when it will arrive, but our internal theme is that teeth do not heal themselves. Our team is optimistic about the fundamentals of the industry, and we embrace the current challenges and are confident in our strategy, our customers and our team. Thank you.\n And with that, we'll take questions.\n | Dentsply International Inc | (NASDAQ:XRAY) | Aug 6, 2020 | 8:00 a.m. ET | 8 | am | 2020-08-06 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | We hope that you and your families remain safe and healthy. | We hope that you and your families remain safe and healthy. | [0.49523106 0.02140608 0.4833628 ] | positive | 0.473825 | 2020-08-07 | 44.029999 | 44.799999 | 42.349998 | 43.259998 | 5080750.0 | 43.419998 | 45.360001 | 43.349998 | 45.360001 | 2843473.0 | Health Care | 2020-06-30 | 2020-06-30 | -0.18 | -0.024684 | 2020-06-30 | XRAY | -0.155316 | miss | 1.330002 | increase | 1 | positive |
| 594 | YMAB | /earnings/call-transcripts/2020/08/07/ymabs-therapeutics-inc-ymab-q2-2020-earnings-call.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>YmAbs Therapeutics, Inc.</strong> <span class="ticker" data-id="340446">(<a href="https://www.fool.com/quote/nasdaq/y-mabs-therapeutics-inc/ymab/">NASDAQ:YMAB</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">9:00 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Good morning, and welcome to the Y-mAbs Therapeutics, Inc. Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. Let me quickly remind you that the following discussion contains certain statements that are considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Because forward-looking statements involve risks and uncertainties, they are not guarantees of future performance, and actual results may differ materially from those expressed or implied by these forward-looking statements due to a variety of factors, including those factors discussed in the company's annual report on Form 10-K for the fiscal year ended December 31, 2019, as well as with the SEC on March 12, 2020, and in the company's sequentially filed SEC reports.</p><p>At this time, I would like to turn the conference over to Mr. Thomas Gad, the company's Founder, Chairman and President. Please go ahead, sir.</p><p><strong>Thomas Gad</strong> -- <em>Founder, Chairman, President & Head of Business Development and Strategy</em></p><p>Thank you, Donna. Thank you, everyone, and good morning, and thanks for joining us today. I hope I go through loud and clear. I know we had a storm, but the lines are up and running. So despite the COVID-19, the second quarter of 2020 has been very strong for Y-mAbs. We believe we've made significant progress on executing our strategy and taking steps that will position us very well for the potential product launches of our two lead product candidates, naxitamab and omburtamab. As you know, we have completed the submission of the naxitamab BLA in March and received a PDUFA date for November of this year. And in addition, the submission of the omburtamab BLA to the FDA was completed earlier this week.</p><p>We ended the second quarter with approximately $158 million in cash. So we believe we have a strong balance sheet to support the potential launch of both naxitamab and omburtamab, while at the same time achieving our development pipeline. We believe that our cash position will carry us through the end of 2022 without taking into consideration any product sales or potential partnership income. And we're very pleased with our financial position, which Bo will talk about later on this call.</p><p>As a company, we always work very hard to stay tuned to our position as a leader in pediatric oncology, addressing clear unmet medical need and focusing on advancing our therapies to reach the lives of children living with these rare cancers. Concurrently, it's pleasing to see our pipeline and technology platform widen its reach into adult patient populations, with lutetium-labeled omburtamab will soon be tested in adult B7-H3-positive cancers and the GD2 biospecific scheduled to enter Phase II in small cell lung cancer later this year.</p><p>We're also very excited about our new licensing agreement with MSK and MIT, which we entered into in April to expand our antibody platform with the SADA technology. We believe the SADA technology represents a new approach to pretargeted radioimmunotherapy, which we refer to as liquid radiation. And SADA may have potential to improve the current treatment landscape in oncology since it appears to enhance the therapeutic index of payload delivery. We believe SADA's technology appears to be very promising and may be able to take radio-conjugated antibody constructs to a new level and potentially open up for much broader usage than any other radiolabeling technology in the antibody area.</p><p>We expect to deploy the SADA technology in a range of adult tumors as well as pediatrics. And our targets include in HER2 for breast cancer, B7-H3 for prostate cancer and GPA33 for colon cancer, thereby adding further exposure for the company in adult patient populations. I'm also very happy to announce that Laura Hamill has joined our Board of Directors. Laura has extensive experience in the industry with over 30 years of global commercial experience and a rarity of executive leadership position, most recently as Executive Vice President at Gilead. Laura adds significant commercial expertise to our Board, which will be a great value to our plans for commercial organization and bring our product candidates to patients. And today, obviously we'll hear remarks from Dr. Claus Moller, our CEO; and Bo Kruse, our Chief Financial Officer.</p><p>And I will hand it over to Claus now. Thank you.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thank you, Thomas, and welcome again to Y-mAbs Therapeutics Second Quarter 2020 Earnings Call. We are very pleased that you have chosen to spend this morning with us. Let me start by saying that we continue to closely monitor the impact of COVID-19 on our business. We have implemented a number of measures to protect the health and safety of our employees, while also taking steps to mitigate potential disruption to our supply chain and continue our clinical trials and planning of commercial activities.</p><p>While we have seen some near-term impact on clinical trial site initiation and patient enrollment, we have not changed our guidance for key anticipated 2020 clinical data readouts. To date, we are pleased with the continuity of our business and our ability to support the critical need of cancer patients in our ongoing trials. We will keep you updated as appropriate going forward. During the second quarter, we have continued to work hard to ensure that our two lead product candidates, naxitamab and omburtamab, advance toward the market. For naxitamab, as you will recall, we completed the BLA for naxitamab in March this year, and we have now received the PDUFA date November 30 this year. And had a number of dialogues with the agency and are still confident that we will be able to stick to this plan.</p><p>The BLA is for treatment of patients with relapsed/refractory high-risk neuroblastoma in bone and bone marrow. The BLA submission is based on the safety and efficacy results of the pivotal studies called 201 and 12-230, which we expect to present data from at a suitable venue later this year. In terms of post-marketing commitments, we are aiming for a two year progression-free survival for the planned patients from the Study 201, and in addition to the ones that were in the filing. In addition to the BLA for naxitamab, we have trials ongoing in Barcelona and at MSK for first-line neuroblastoma as well as chemo-combination trials for refractory neuroblastoma patients. During the remainder of 2020, we expect to initiate an international Phase II multicenter trial for naxitamab in both frontline and with chemo-combination treatments.</p><p>Now let me jump to omburtamab, our lead our second lead compound. We had the pre-BLA meeting with the FDA in February this year, and we're very pleased to have our plans confirmed by the agency for the BLA. We initiated the rolling BLA in June and completed the BLA submission earlier this week for the treatment of patients with CNS/leptomeningeal metastases from neuroblastoma. This is a few weeks later than we had originally anticipated back in February after the pre-BLA meeting, but before the COVID-19 started to affect our activities. However, we are very pleased to have the in-house competence to work and coordinate the submissions of another BLA filing only four months after the completion of the submission of the naxitamab BLA, and we will continue to keep you posted on our progress.</p><p>We are hoping to confirm a post-marketing commitment showing three year overall survival from 32 patients from the Study 101 to be significantly better than a 10% overall survival reported historically. We will present preliminary data from the pivotal 101 study in CNS/leptomeningeal metastases from neuroblastoma at SIOP later this year. That's in October. In addition to the U.S. development program, we are making good progress in Europe and we plan to submit a marketing authorization application for omburtamab within the next six months. This is a vital step forward in our efforts to potentially bring omburtamab to the market in Europe in 2021.</p><p>As previously discussed, we're also developing omburtamab for diffuse intrinsic pontine glioma, known as DIPT, in a Phase I study at MSK, and we are planning to open a multicenter Phase II study for DIPT patients in 2020. For desmoplastic small round cell tumors, also known as DSRCT, we have recently opened a Phase II study at MSK. For our lutetium-177 labeled omburtamab-DTPA construct, we are planning to open a multicenter Phase I/II study in pediatric medulloblastoma next month. And we also plan to open a second Phase I/II study, which will be a basket study for B7-H3-positive CNS/leptomeningeal metastases in adult patients later this year. For both studies, we hope to utilize our prior experience of treating patients these indications with the iodinated 131-iodine omburtamab. I'm very pleased to see the second-generation omburtamab entering the clinic very soon.</p><p>On the commercial standpoint, we believe that we are very much on track to build the rightsized, best-in-class commercial organization in time for the potential approvals of both naxitamab and omburtamab. Should the potential naxitamab approval even come before the PDUFA date, we will also be prepared for that. Given the small universe of pediatric cancer centers that treat the majority of the neuroblastoma patients, we believe that we can build a lean and highly targeted commercial organization and launch both compounds ourselves. Our commercial team is largely in place. As many of you know, we hired our Chief Commercial Officer, Phil Herman, more than two years ago, and we have been building his team ever since.</p><p>In addition, we have medical science license and medical affairs groups in place, so we believe we are positioned very well for the potential the launch of naxitamab and omburtamab in the U.S. market. Since European marketing application for omburtamab is potentially only about six months behind the U.S., we plan to begin staffing our European commercial operations toward the end of 2020. The SADA technology that Thomas also mentioned briefly was licensed in April. It's an agreement with Memorial Sloan Kettering Cancer Center and Massachusetts Institute of Technology for a worldwide exclusive license and research collaboration to develop the antibody construct based on the SADA molecule self-assembling/disassembling antibody constructs. It's a radioimmunotherapy platform. We also refer to the SADA platform to as liquid radiation.</p><p>The SADA platform operates in a two-step manner. In the first step, a saturating dose of tumor-targeted, unlabeled, bispecific antibody fragment is injected. These bispecific antibody fragments are self-assembled in-vitro prior to the injection into tetramers and subsequently bind to the tumor cells. After a few hours, excess tumor-targeted antibody constructs that have not bound to the targeted tumor cells disassemble due to the dilution in serum into smaller antibody fragments that are then subsequently excreted quickly through the kidneys. In the second step, the next day, when the concentration of antibody constructs not bound to the tumor is at its peak and much higher than in normal organs, a radiolabel compound that binds to the other end of the bispecific constructs, the DOTA binding part, is injected.</p><p>In published papers utilizing similar approaches, data indicate that this two-step process results in a much higher tumor/nontumor concentration ratio, which we believe is favorable for radiotherapy since it substantially minimizes the radiation damage to healthy tissues. We believe SADA potentially could improve the efficacy of radiolabeled therapeutics in tumors that have not historically demonstrated meaningful responses to radiolabeled agents, i.e., tumors with multiple microscopic lesions, larger than three or four centimeters in diameter, as it appears to subsequently allow a higher radioactivity level to be injected without impairing the hematological toxicity. We have initiated development of a number of SADA-based constructs created by MSK, including GD2-SADA for GD2-positive solid tumors, a GPA33-SADA for potential use in colon cancer and HER2-SADA for potential use in breast cancer.</p><p>And we expect to advance a series of proprietary constructs as well as we were very pleased to designate the B7-H3-SADA for potential use in prostate cancer as the first of these constructs a few weeks ago. We plan to file the first IND within the next 12 months for a SADA construct and hope to start treating patients with this exciting technology shortly thereafter. We believe the SADA technology platform makes tremendous sense for Y-mAbs, and it could potentially allow us to unlock even further potential in the field of regulated antibodies, both for specialty oncology indications and also in larger adult indications. The platform is also available for sublicensing, and we hope to see the SADA technology make significant contribution to improve the treatment landscape in radioimmunotherapy in the coming years. To support our growth plan, we have increased our headcount to a total of 89 employees during the second quarter of the year.</p><p>Due to the COVID-19, the increase is modest compared to prior quarters, and the growth represents addition to the development team as well as to the commercial team that is ramping up for the potential commercial launch of naxitamab and omburtamab. With the PDUFA date in late November 2020, we continue to believe that we are well positioned to move naxitamab to FDA approval and commercialization later this year. For omburtamab, we believe that we are well positioned for the potential FDA approval and commercialization in the beginning of 2021. Concurrently, we plan to increase our focus on constructs generated by the SADA technology and the earlier-stage product candidates in our pipeline, including the lutetium-label omburtamab and the bispecific antibody programs, as well as the next-in-line indications for naxitamab and omburtamab.</p><p>Now let me invite Bo to share his remarks on the second quarter financials.</p><p><strong>Bo Kruse</strong> -- <em>Vice President and Chief Financial Officer</em></p><p>Thank you, Claus. We reported a net loss for the quarter ended June 30, 2020, of $40.4 million or $1.01 per share, basic and diluted. This compares to a net loss of $18 million or $0.53 per share basic and diluted for the quarter ended June 30, 2019. We ended the second quarter with a cash position of $158 million compared with the 2019 year-end cash position of $207 million. As our work on the omburtamab BLA submission has progressed through the quarter and as we continue to accelerate the commercial ramp up for the potential launch of both naxitamab and omburtamab, we have seen our cash burn increase.</p><p>We expect the cash burn from operating expenses for the remaining quarters in 2020 to increase slightly, but remain roughly in line with last couple of quarters. With respect to the recent announcement of the SADA license, we do not expect this to have a material impact on our spending in 2020. As we take a closer look at the operating expenses for the second quarter, we note that R&D expenses have increased by $15.6 million from $14.5 million for the quarter ended June 30, 2019, to $30.1 million for the quarter ended June 30, 2020. This increase was primarily attributable to a $1.8 million increase in personnel costs and a $13.3 million increase in milestones and license fees as per the SADA agreement. In the second quarter, most of the SADA-related expenses were noncash items.</p><p>G&A expenses increased by $6.3 million from $4.1 million for the quarter ended June 30, 2019, to $10.4 million for the quarter ended June 30, 2020. The increase in G&A expenses primarily reflects a $1.9 million increase in personnel costs, a $3.5 million increase in expenses for the building of our commercial infrastructure related to the potential launch of our two lead product candidates, naxitamab and omburtamab, and a $0.9 million for business insurance and professional fees. Cash used in operating activities in the first half of 2020 show that the cash burn increased by $21.9 million from $27.5 million for the period ended June 30, 2019, to $49.4 million for the period ended June 30, 2020. The increase was primarily caused by the increase in net loss for the period.</p><p>The net loss itself increased by $32.6 million for the period ended June 30, 2020, and was partially offset by an increase in noncash expenses, including depreciation and stock-based compensation of $11.7 million. In terms of financial guidance, since the secondary offering last year, we've said that cash on hand plus net proceeds from the offering would cover our operating activities and capital expenditures through the fourth quarter of 2022. This does not take into account any potential revenues from commercialization of naxitamab and omburtamab or the proceeds from any potential future partnerships. So we believe that Y-mAbs remains in a very healthy financial position.</p><p>This concludes the financial update. And I'll now turn the call over to Thomas.</p><p><strong>Thomas Gad</strong> -- <em>Founder, Chairman, President & Head of Business Development and Strategy</em></p><p>Thank you, Bo. Thank you, everyone. So Donna, if you would open up for Q&A and just go through the process of how that will work.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-57739">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-57739');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] Our first question is coming from Alec Stranahan of Bank of America. Please go ahead.</p><p><strong>Alec Stranahan</strong> -- <em>Bank of America -- Analyst</em></p><p>Hey guys, thanks for taking our questions. Two from me. My first question is on the GD2-GD3 bispecific. In the first indications of relapsed/refractory neuroblastoma and osteosarcoma, is the hopes here that we'll see better safety in naxitamab in terms of the grade three pain? Or do you think we could also see a boost in efficacy given the higher potency in preclinical models? And in terms of timing of the data, I think I recall you mentioned we might see early efficacy at SIOP in the fall, but I didn't see it in the titles you listed. So any additional color there on time lines for data release would be great.</p><p>And then my second question is on the commercialization front. I know launch is still a few months away and things could change. But given the situation with COVID, how are you building the potential for extended social distancing and mobility issues into your approach to marketing naxitamab and omburtamab? And how are you weighing boots on the ground versus virtual interactions in your launch preparations?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thanks, Alec. Just your first question to the bispecific antibody. We are still hoping that during the fall we will be able to come out with some preliminary data from the Phase I/II dose-escalation study on the bispecific antibody. And hopefully also some preliminary indication of both safety and efficacy. The idea is that due to the lower doses that we are using that we potentially could see less pain side effects with this. The patients that we are putting on study is patients that have already progressed while having received GD2 antibody, although we have a fantastic naxitamab GD2 antibody, you will recall for second-line patients that are secondary refractory, we only have about if you include those, we can put in remission in combination with chemotherapy, about 60% of the patients to come into remission, which also tells you that the remaining 40% are still not in remission. So there is a significant unmet need still for those patients.</p><p>And of those 60% that does come in to remission approximately, if you look at Dr. Kushner's data from SIOP last year, you will see that the two year progression-free survival for those that are coming to remission are about 37%. So there's clearly still more to be done for these kids. So if the bispecific antibody could help out, initially, it will be developed for those that are not staying in remission after first or second relapse. And then, of course, you would try to advance it and see if you use it in earlier stage, you can actually keep patients more patients in remission for a longer time and put more patients in remission with the product. And for the osteosarcoma patients, the thing is, today, there's nothing approved for patients that are beyond frontline treatment in osteosarcoma.</p><p>So that's definitely an unmet medical need there. And then and I know we have at least three or four osteosarcoma patients on the study, and we are looking very much forward to see how that progresses. In terms of the commercialization, well, we're definitely paying attention to the issue with COVID-19, and we are preparing to do a virtual launch. Right now, there's a limit to how much that can be done. It seems to be our experience monitoring what other people are doing that physicians are very open, in particular, to new products coming to the market to do virtual interviews and presentations. So we are preparing for that situation that we may not be able to put feet on the ground in the hospitals, but have to do the launch virtually. So I was discussing this and have been discussing this a number of times with Phil heading the commercial team. So he's perfectly prepared for that situation also.</p><p>Did that answer your question?</p><p><strong>Alec Stranahan</strong> -- <em>Bank of America -- Analyst</em></p><p>Yes. That's perfect. And congrats on all the progress.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thank you.</p><p><strong>Alec Stranahan</strong> -- <em>Bank of America -- Analyst</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question is coming from Etzer Darout of Guggenheim. Please go ahead.</p><p><strong>Etzer Darout</strong> -- <em>Guggenheim -- Analyst</em></p><p>Hi, thanks for taking the question. I guess the first one on just Danyelza and Omblastys. If you could maybe provide some commentary on access, pricing and reimbursement, conversations that you're having with payers and how sort of you're kind of communicating what you've kind of characterized as optimal pricing. And then just secondly, if you could maybe give a little bit more color on the data you've seen for omburtamab in adults and sort of how that may be kind of read through to the lutetium product that you're advancing in adult patients.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Well, thanks for the questions. And in terms of pricing, it's difficult for me right now to give you any details on the pricing. We have previously discussed some ballpark figures where you could expect the pricing to end. But I think I have nothing further right now until but I would in terms of price resistance, I have to say that we're not meeting any. And it doesn't matter which kind of price level we are discussing within the levels where other people for these very expensive niche products are selling right now. So I don't foresee any issues with pricing. Remember, for omburtamab, we are taking a group of kids where everybody is historically expected to die from the disease and we cure 50% of them.</p><p>I think it's very hard not to start arguing about pricing as long as you stay within a reasonable amount of cost. In so that's as much on the pricing. And the other question was omburtamab in adults. And we presented some preliminary data from the iodinated version. I mean many of these patients that went on the iodinated omburtamab for CNS/leptomeningeal metastases for ovarian cancer and for melanoma and sarcomas, etc. that we have on the study, were really terminal when they came on to the protocol. I remember the woman with the ovarian cancer had 14 metastases that was visible on her scans when we put on. And nevertheless, she lived for 1.5 year, which is, I would say, unprecedented.</p><p>There's no doubt that you need to come as quickly as possible if you want to get full benefit of a treatment like the omburtamab lutetium. So like for the kids we put on this treatment, where we get these fantastic results, remember, before they come on the treatment, they receive standard of care, which is induction chemo, surgery and radiation to their tumors in the brain. After that, their expected median survival is six months from diagnosis of CNS disease and their expected three year overall survival is 10%. So these patients are receiving optimal treatment.</p><p>If I'm the patients that we will put on the adult protocol will be those that say, that have a melanoma relapsing in the brain, they will also receive induction chemo with temozolomide and maybe some irinotecan. And then they will get surgery for the lesions that are visible, and then they will get whole brain radiation probably 25 grade total. And after that, most of the patients will be NED. And nevertheless, the likelihood that they will be alive 12 months later is 15%. So those patients just after they finish that would be optimal to put on this.</p><p>Based also on the experience we have, we have treated a number of melanoma patients. And again, as I said, most of them come at a time point where there's no other alternatives and they have received whatever palliative care they could receive. I hope that answers your question to the extent...</p><p><strong>Etzer Darout</strong> -- <em>Guggenheim -- Analyst</em></p><p>No great, yes. And congrats on all the progress.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thank you very much.</p><p><strong>Etzer Darout</strong> -- <em>Guggenheim -- Analyst</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question is coming from Robert Burns of H.C. Wainwright. please go ahead.</p><p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p><p>Hi guys, thanks for taking my questions and Congrats on the progress. Just a few from me, if I may. So since you're advancing both the GD2 bispecific and GD2-SADA assets, could you discuss the potential overlap of these assets? And in what setting do you believe each is likely to be preferentially used? As well as whether you see any profitability for cannibalization of the others' revenue potential, particularly in SCLC? And then I have one more after that.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Okay. So first, well, of course, there is a potential that one of them could cannibalize the other one. But remember, one is right now in the early preclinical testing, meaning we are getting ready for tox studies. It will probably enter clinic by the middle of next year, third quarter next year. That's the SADA construct. The other one is ready to start three Phase II studies later this year.</p><p>And when we started this development, we didn't have the SADA technology, and we don't know how the SADA technology will work in patients. Remember, it's never been in patients before. But if the SADA technology works, the way I believe it's working, it's going to be the biggest game changer that we have seen in oncology for the last 30 years. And then it's going to completely compete out the bispecifics. Then it has the potential to compete out basically anything. The SADA constructs are only dependent on the receptor on the cancer cells. As long as you can identify something that is selectively, to some degree, expressed not even on all the cancer cells because radiation from lutetium penetrates like one to 1.5 millimeters in cancer tissue.</p><p>So you get a ton of bystander effect from these radiolabeled constructs. Whereas a bispecific antibody is dependent on T cell activation, a naked antibody like naxitamab is dependent on NK cells and macrophages and ADCC activation. These constructs, even if I take a late-stage patient that have been through 4, five different regimens of cancer therapy, has no immune system that's really working anymore, but the cancer is still expressing the target and the patient has hundreds of micrometastases, my SADA construct will still work, it's just going to go in there and eat it.</p><p>So if the SADA works, I would agree that it could potentially cannibalize anything that naxitamab and the bispecific GD2. But I've been long enough in this industry to know that you should not abandon the stuff that you have coming to the market just because you believe that something in your research lab looks more interesting. But it shouldn't stop us from pushing that forward. And I have to say, and I've said it many times already now, I'm extremely excited about our SADA technology. It is really the best stuff I've seen since I started working with antibodies back in the 1980s in a different venue. Did that answer the question?</p><p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p><p>Oh, it certainly did. I certainly look forward to the whole SADA constructs. One more from me. So considering that Y-mAbs is eligible to receive a PRV upon approval of naxitamab and omburtamab, have you already lined up potential buyers for them?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>We have lined up some people that will help us make sure we get the best possible price for it. So but I know also from one of these said that the last two ones that they were involved in selling took three to four weeks to sell. And you may have seen that there was another one that was sold about a week ago for $100 million.</p><p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p><p>Yes, that seems to be what they're going for, roughly. Claus, congrats again on the progress.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thanks a lot, Rob.</p><p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question is coming from David Lebowitz of Morgan Stanley. Please go ahead.</p><p><strong>David Lebowitz</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>Thank you very much for taking my question. Given that you have two BLAs that are currently in progress, have you had any discussions with the agency regarding how facility inspections will be conducted for both applications?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Yes. I don't foresee any problems in that context, and they have also been monitoring sites and haven't seen any issues in that context either. But there is that there could potentially be a challenge if the FDA cannot go and inspect the omburtamab facility in France in the first quarter next year. But I would be surprised if that's not the case. I mean we are then at a time point where at least a lot of the big pharmas have promised that there will be vaccines available in the hundreds of millions of doses. So but for naxitamab, I don't foresee any issues.</p><p><strong>David Lebowitz</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>Excellent. And one additional question. With respect to radiolabeled products, how will you, I guess, juxtapose the U.S. market versus the European market in how such therapies are used and delivered?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>The first commercial delivery site we had was in South Bend, Indiana in the U.S., and we are planning in the next 12 months to open a second site in Europe. In addition to that, we're also working on an additional U.S. site. So but we have the site that is basically a part of the BLA is in the U.S. and the European approval will not come until probably toward the end of 2021. So we should be up and running with the European site at that time point also. But we can ship you from the site in Indiana. It's no problem for us to ship. We're already doing that, shipping from U.S. to Europe for the clinical trials and having the product available at the hospital in due time for use.</p><p><strong>David Lebowitz</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>Thank you for taking my question.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thanks, David.</p><p><strong>David Lebowitz</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Our next question is coming from Peter Lawson of Barclays. Please go ahead.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>All right, thanks for taking my questions. Just on the data for naxitamab, it that looks really encouraging. Just what's the pushback that you've had outside MSKCC? And how do you overcome that?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Well, I would say, I don't think we have had any significant pushback. It's I mean, it's really hard to push back when you have a treatment that you right now, inside outside of MSK and if they're not in our clinical trial, they will use dinutuximab in second-line patients together with chemotherapy. And that gives about a 40% response rate. And we come here with a naked antibody therapy in an outpatient setting without chemotherapy, and we get much better responses. So I mean, I haven't heard any real qualified arguments why you would not use this in second line. And it's hard for me to imagine that any doctor would not use naxitamab in primary or secondary refractory patients according to indication and rather go for something else. And you can argue if they say.</p><p>But I want to use the antibody in combination with chemotherapy. We have two studies out there where we use it in combination with chemotherapy, and we're getting very nice results there also. And we are starting a multicenter study very soon this year, also in chemo combination. So I haven't heard any concrete arguments against it. As I said, there's a lot of people that are happy that they have access to dinutuximab and are using it, both in front and second line, but it doesn't mean that they will then when there's something that can be used in an outpatient setting with less side effects, why wouldn't they?</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>Good. Okay. And then...</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>With pediatric oncology, a lot of the treatment is driven by the parents. So the parents will also have a lot of saying about this. If the doc tells you I'm going to treat your kid in the intensive care unit for eight days in combination with chemotherapy and there may be some significant side effects, but I think it's a good treatment for your second line patient here. And the parents know that there's an FDA-approved product for second-line patients that can be done in an outpatient setting without chemotherapy. I mean, they're going to ask the doctor why on earth you would not be using that. So...</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>And how much work do you have to do with patient advocacy groups?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Well, I mean, of course, we are in dialogue with them and talking to them, and they are definitely aware of it. We have been in dialogue with them since we started working with Y-mAbs five years ago. I mean this all came to some degree out of the patient advocate groups. So but we have a very close dialogue with many of them. But it's not kind of like that. But they are independent groups and, of course, we fully respect that. But of course, we have a dialogue with them and they are fully aware of that treatment.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>Good. And then the pivotal 101 study at SIOP later this year. What should we expect to see in that data? What should we be looking for?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Well, I mean, for the omburtamab, we definitely would be planning to present some of the data from the Study 101, the multi-center study and also the survival data that we have available at that time point. And for the 201 study, again, the data used for the FDA filing and the updated data from that study. So whatever is available in terms of updated data. Remember, the data set that was last presented from the 101 study was with a cutoff date that is almost a year ago. And the same goes for the 201 data. The data cutoff for the 201 study was in July 1, 2019. So we have more than a year of additional follow-up on the data there.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>Great. And then the bispecific, that was I thought that was going to be at SIOP. Has that been delayed kind of COVID-related issues or...</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Yes. Well, I mean, the thing was that we have decided not to stop dose escalating. And the requisite for a late-breaking abstract is that the study is not ongoing. So since it's still dose escalating but I have to say that we're not beyond the cohort 6. Also, we need to we're working with some ways to handle some of the side effects that we are seeing. So but it's not that we are expecting it to delay any of the time lines. We're still planning for going into the Phase II studies. But of course, we want to make sure that we are at a higher dose level as we can be and to see if we can get beyond the cohort six level.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>Great, thank you so much. Thanks for taking my questions.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Much appreciated.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Our next question is coming from Anupam Rama from JPMorgan. Please go ahead.</p><p><strong>Tessa Thomas Romero</strong> -- <em>JPMorgan -- Analyst</em></p><p>Good morning, guys. This is Tessa on the call this morning for Anupam. The rolling submission for omburtamab is now you just announced was complete yesterday. What are some of the next steps and key interactions with regulators as we head toward a potential approval?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Well, the FDA now has 60 days to make up their minds whether they believe that the BLA is complete or whether it's faulty and therefore should be returned or refused to file. And typically so then you receive what's called a day 75 letter, which means that the FDA typically 75 days. So if you don't get a refuse to file within 60 days, you get a day 75 letter that includes your PDUFA date, which will then be six months after the 60 days, i.e., eight months after you filed or completed your own BLA. But the day 75 letter doesn't necessarily come 15 days after the day 60, it can come a month after if they have some questions and stuff. And also for the naxitamab, we had an interaction with the FDA already in the first 60 days where they asked us for what they called an application orientation meeting.</p><p>And where they had a ton of people available to get to make sure that they had a complete understanding of the various parts of the filing. So there's going to be, I think, already from within the next two to three weeks, beginning correspondence with RFIs, request for information from the agency. So as for the naxitamab, since we completed the rolling BLA in March, we have had a number of conference calls and discussion meetings, etc. with the agency. So this is a continued dialogue. You just you don't just sit down and wait six months and then cross your fringes and hope that they are happy with everything. There's a lot of dialogue. And very constructive. And I think also because we have breakthrough designation, the FDA has, also before we filed, given us a lot of constructive advice for both filings. So we have I think we have a great and very constructive dialogue with the agency on these two filings.</p><p><strong>Tessa Thomas Romero</strong> -- <em>JPMorgan -- Analyst</em></p><p>Great, Thank You For Taking Our Question Okay,</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question is coming from Peter Lawson of Barclays. Please go ahead.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>Right. Thanks for taking the follow-up Just on the SADA construct for B7-H3 in prostate cancer. Look, we see the initial data and why do you think it works in prostate cancer. And is that based on your own data or peer data?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Well, there's a lot of documentation that B7-H3 is highly expressed on prostate cancer. And the construct that we are using here remember, the omburtamab antibody is a murine antibody IgG1. And the construct, the binding single chain, if we, again, see the B7-H3 that we are using for the SADA, is a humanized version of the antibody that's modified. So it doesn't seem to cross-react with any liver tissue, which can be the issue with some bispecific or some B7-H3 antibodies. So it's a modified version that we at least based on what we have seen in the research, do not expect to cross-react with liver issue.</p><p>And the reason for going for this, I mean, prostate cancer is a huge indication. And with the SADA technology, a part of that technology package the other part of this SADA construct binds DOTA molecules. And DOTA is obvious for lutetium because it works as a key later. But we also, as a part of the package, have a technology we call Proteus. And the Proteus is a benzyl binder that can carry actinium linked to the DOTA. So that means that and you know that prostate cancer is very sensitive to alpha emitters. And one of the ideas is that we want to use the Proteus construct as an alpha-emitter against the prostate cancer. And the nice thing here is that it's just going to find any micrometastasis expressing B7-H3.</p><p>And even if it's only one in 10 prostate cancer cells that's expressing it, whereas we normally know that it's more than 90%, it's going to kill all of them. Because although the alpha-emitter is not penetrating a millimeter, but maybe just 0.1 or 0.2 millimeters, it's still extremely lethal to the cancer cells. So it's it just made a lot of sense for us with the knowledge that's out there about prostate cancer and B7-H3 expression. And since we had the construct to start working on it, and of course, we started working on it quite a while ago and just kept pushing it until we had a construct that we felt comfortable moving forward to actual cGMP production for. Did that answer the question?</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>It did, other than when could we see data?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>I don't know, Peter. As soon as we can get some, we'll present them.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>But you've kind of pushed to have some preclinical data out there or kind of hold that back.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Well, I mean, yes, some. But we don't we would have to put together a paper. It's not something that would go for an oral presentation. So we could put together for a paper for it. But honestly, I think the interesting thing here is because even if I showed you a ton of animal data that this works perfectly in the mice, let's get it into patients, that's what matters. And happy to see whenever we have tox data available also to share that whatever we see there and get in there. But the key thing that drives this is actually having a cGMP production available and approved IND, and get the stuff in the patients.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>Got you. And then the bispecific data, would you end up just press releasing that? Or you want to try and find a venue?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>I'll get back to you whether we do one or the other.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>But it's still kind of year-end we should see bispecific?</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Yes. Yes. We have some plans, but they're not final. Not yet. So and it's definitely our intention to present data before the end of the year.</p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p>Okay. Thanks much.</p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>At this time, I would like to turn the floor back over to management for any additional or closing comments.</p><p><strong>Thomas Gad</strong> -- <em>Founder, Chairman, President & Head of Business Development and Strategy</em></p><p>Thank you. I mean thank you, everyone. Thank you, Claus. Thank you, Bo. Thank you for all the great questions, and this concludes our call then. Have a great day.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks].</p><p><strong>Duration: 47 minutes</strong></p><h2>Call participants:</h2><p><strong>Thomas Gad</strong> -- <em>Founder, Chairman, President & Head of Business Development and Strategy</em></p><p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p><p><strong>Bo Kruse</strong> -- <em>Vice President and Chief Financial Officer</em></p><p><strong>Alec Stranahan</strong> -- <em>Bank of America -- Analyst</em></p><p><strong>Etzer Darout</strong> -- <em>Guggenheim -- Analyst</em></p><p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p><p><strong>David Lebowitz</strong> -- <em>Morgan Stanley -- Analyst</em></p><p><strong>Peter Lawson</strong> -- <em>Barclays -- Analyst</em></p><p><strong>Tessa Thomas Romero</strong> -- <em>JPMorgan -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/ymab">More YMAB analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Y-mAbs Therapeutics, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DY-mAbs%2520Therapeutics%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=3de84606-3a1a-4259-b48f-c7c11a279652">ten best stocks</a></strong> for investors to buy right now… and Y-mAbs Therapeutics, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DY-mAbs%2520Therapeutics%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=3de84606-3a1a-4259-b48f-c7c11a279652" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-98332", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["YMAB"], "primary_tickers_companies": ["Y-mAbs Therapeutics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "YmAbs Therapeutics, Inc. (YMAB) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 34, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-98332"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-98332", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["YMAB"], "primary_tickers_companies": ["Y-mAbs Therapeutics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "YmAbs Therapeutics, Inc. (YMAB) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 34, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], YMAB earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>YmAbs Therapeutics, Inc.</strong> <span class="ticker" data-id="340446">(<a href="https://www.fool.com/quote/nasdaq/y-mabs-therapeutics-inc/ymab/">NASDAQ:YMAB</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 7, 2020</span>, <em id="time">9:00 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Good morning, and welcome to the Y-mAbs Therapeutics, Inc. Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. Let me quickly remind you that the following discussion contains certain statements that are considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Because forward-looking statements involve risks and uncertainties, they are not guarantees of future performance, and actual results may differ materially from those expressed or implied by these forward-looking statements due to a variety of factors, including those factors discussed in the company's annual report on Form 10-K for the fiscal year ended December 31, 2019, as well as with the SEC on March 12, 2020, and in the company's sequentially filed SEC reports.</p>, <p>At this time, I would like to turn the conference over to Mr. Thomas Gad, the company's Founder, Chairman and President. Please go ahead, sir.</p>, <p><strong>Thomas Gad</strong> -- <em>Founder, Chairman, President & Head of Business Development and Strategy</em></p>, <p>Thank you, Donna. Thank you, everyone, and good morning, and thanks for joining us today. I hope I go through loud and clear. I know we had a storm, but the lines are up and running. So despite the COVID-19, the second quarter of 2020 has been very strong for Y-mAbs. We believe we've made significant progress on executing our strategy and taking steps that will position us very well for the potential product launches of our two lead product candidates, naxitamab and omburtamab. As you know, we have completed the submission of the naxitamab BLA in March and received a PDUFA date for November of this year. And in addition, the submission of the omburtamab BLA to the FDA was completed earlier this week.</p>, <p>We ended the second quarter with approximately $158 million in cash. So we believe we have a strong balance sheet to support the potential launch of both naxitamab and omburtamab, while at the same time achieving our development pipeline. We believe that our cash position will carry us through the end of 2022 without taking into consideration any product sales or potential partnership income. And we're very pleased with our financial position, which Bo will talk about later on this call.</p>, <p>As a company, we always work very hard to stay tuned to our position as a leader in pediatric oncology, addressing clear unmet medical need and focusing on advancing our therapies to reach the lives of children living with these rare cancers. Concurrently, it's pleasing to see our pipeline and technology platform widen its reach into adult patient populations, with lutetium-labeled omburtamab will soon be tested in adult B7-H3-positive cancers and the GD2 biospecific scheduled to enter Phase II in small cell lung cancer later this year.</p>, <p>We're also very excited about our new licensing agreement with MSK and MIT, which we entered into in April to expand our antibody platform with the SADA technology. We believe the SADA technology represents a new approach to pretargeted radioimmunotherapy, which we refer to as liquid radiation. And SADA may have potential to improve the current treatment landscape in oncology since it appears to enhance the therapeutic index of payload delivery. We believe SADA's technology appears to be very promising and may be able to take radio-conjugated antibody constructs to a new level and potentially open up for much broader usage than any other radiolabeling technology in the antibody area.</p>, <p>We expect to deploy the SADA technology in a range of adult tumors as well as pediatrics. And our targets include in HER2 for breast cancer, B7-H3 for prostate cancer and GPA33 for colon cancer, thereby adding further exposure for the company in adult patient populations. I'm also very happy to announce that Laura Hamill has joined our Board of Directors. Laura has extensive experience in the industry with over 30 years of global commercial experience and a rarity of executive leadership position, most recently as Executive Vice President at Gilead. Laura adds significant commercial expertise to our Board, which will be a great value to our plans for commercial organization and bring our product candidates to patients. And today, obviously we'll hear remarks from Dr. Claus Moller, our CEO; and Bo Kruse, our Chief Financial Officer.</p>, <p>And I will hand it over to Claus now. Thank you.</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>Thank you, Thomas, and welcome again to Y-mAbs Therapeutics Second Quarter 2020 Earnings Call. We are very pleased that you have chosen to spend this morning with us. Let me start by saying that we continue to closely monitor the impact of COVID-19 on our business. We have implemented a number of measures to protect the health and safety of our employees, while also taking steps to mitigate potential disruption to our supply chain and continue our clinical trials and planning of commercial activities.</p>, <p>While we have seen some near-term impact on clinical trial site initiation and patient enrollment, we have not changed our guidance for key anticipated 2020 clinical data readouts. To date, we are pleased with the continuity of our business and our ability to support the critical need of cancer patients in our ongoing trials. We will keep you updated as appropriate going forward. During the second quarter, we have continued to work hard to ensure that our two lead product candidates, naxitamab and omburtamab, advance toward the market. For naxitamab, as you will recall, we completed the BLA for naxitamab in March this year, and we have now received the PDUFA date November 30 this year. And had a number of dialogues with the agency and are still confident that we will be able to stick to this plan.</p>, <p>The BLA is for treatment of patients with relapsed/refractory high-risk neuroblastoma in bone and bone marrow. The BLA submission is based on the safety and efficacy results of the pivotal studies called 201 and 12-230, which we expect to present data from at a suitable venue later this year. In terms of post-marketing commitments, we are aiming for a two year progression-free survival for the planned patients from the Study 201, and in addition to the ones that were in the filing. In addition to the BLA for naxitamab, we have trials ongoing in Barcelona and at MSK for first-line neuroblastoma as well as chemo-combination trials for refractory neuroblastoma patients. During the remainder of 2020, we expect to initiate an international Phase II multicenter trial for naxitamab in both frontline and with chemo-combination treatments.</p>, <p>Now let me jump to omburtamab, our lead our second lead compound. We had the pre-BLA meeting with the FDA in February this year, and we're very pleased to have our plans confirmed by the agency for the BLA. We initiated the rolling BLA in June and completed the BLA submission earlier this week for the treatment of patients with CNS/leptomeningeal metastases from neuroblastoma. This is a few weeks later than we had originally anticipated back in February after the pre-BLA meeting, but before the COVID-19 started to affect our activities. However, we are very pleased to have the in-house competence to work and coordinate the submissions of another BLA filing only four months after the completion of the submission of the naxitamab BLA, and we will continue to keep you posted on our progress.</p>, <p>We are hoping to confirm a post-marketing commitment showing three year overall survival from 32 patients from the Study 101 to be significantly better than a 10% overall survival reported historically. We will present preliminary data from the pivotal 101 study in CNS/leptomeningeal metastases from neuroblastoma at SIOP later this year. That's in October. In addition to the U.S. development program, we are making good progress in Europe and we plan to submit a marketing authorization application for omburtamab within the next six months. This is a vital step forward in our efforts to potentially bring omburtamab to the market in Europe in 2021.</p>, <p>As previously discussed, we're also developing omburtamab for diffuse intrinsic pontine glioma, known as DIPT, in a Phase I study at MSK, and we are planning to open a multicenter Phase II study for DIPT patients in 2020. For desmoplastic small round cell tumors, also known as DSRCT, we have recently opened a Phase II study at MSK. For our lutetium-177 labeled omburtamab-DTPA construct, we are planning to open a multicenter Phase I/II study in pediatric medulloblastoma next month. And we also plan to open a second Phase I/II study, which will be a basket study for B7-H3-positive CNS/leptomeningeal metastases in adult patients later this year. For both studies, we hope to utilize our prior experience of treating patients these indications with the iodinated 131-iodine omburtamab. I'm very pleased to see the second-generation omburtamab entering the clinic very soon.</p>, <p>On the commercial standpoint, we believe that we are very much on track to build the rightsized, best-in-class commercial organization in time for the potential approvals of both naxitamab and omburtamab. Should the potential naxitamab approval even come before the PDUFA date, we will also be prepared for that. Given the small universe of pediatric cancer centers that treat the majority of the neuroblastoma patients, we believe that we can build a lean and highly targeted commercial organization and launch both compounds ourselves. Our commercial team is largely in place. As many of you know, we hired our Chief Commercial Officer, Phil Herman, more than two years ago, and we have been building his team ever since.</p>, <p>In addition, we have medical science license and medical affairs groups in place, so we believe we are positioned very well for the potential the launch of naxitamab and omburtamab in the U.S. market. Since European marketing application for omburtamab is potentially only about six months behind the U.S., we plan to begin staffing our European commercial operations toward the end of 2020. The SADA technology that Thomas also mentioned briefly was licensed in April. It's an agreement with Memorial Sloan Kettering Cancer Center and Massachusetts Institute of Technology for a worldwide exclusive license and research collaboration to develop the antibody construct based on the SADA molecule self-assembling/disassembling antibody constructs. It's a radioimmunotherapy platform. We also refer to the SADA platform to as liquid radiation.</p>, <p>The SADA platform operates in a two-step manner. In the first step, a saturating dose of tumor-targeted, unlabeled, bispecific antibody fragment is injected. These bispecific antibody fragments are self-assembled in-vitro prior to the injection into tetramers and subsequently bind to the tumor cells. After a few hours, excess tumor-targeted antibody constructs that have not bound to the targeted tumor cells disassemble due to the dilution in serum into smaller antibody fragments that are then subsequently excreted quickly through the kidneys. In the second step, the next day, when the concentration of antibody constructs not bound to the tumor is at its peak and much higher than in normal organs, a radiolabel compound that binds to the other end of the bispecific constructs, the DOTA binding part, is injected.</p>, <p>In published papers utilizing similar approaches, data indicate that this two-step process results in a much higher tumor/nontumor concentration ratio, which we believe is favorable for radiotherapy since it substantially minimizes the radiation damage to healthy tissues. We believe SADA potentially could improve the efficacy of radiolabeled therapeutics in tumors that have not historically demonstrated meaningful responses to radiolabeled agents, i.e., tumors with multiple microscopic lesions, larger than three or four centimeters in diameter, as it appears to subsequently allow a higher radioactivity level to be injected without impairing the hematological toxicity. We have initiated development of a number of SADA-based constructs created by MSK, including GD2-SADA for GD2-positive solid tumors, a GPA33-SADA for potential use in colon cancer and HER2-SADA for potential use in breast cancer.</p>, <p>And we expect to advance a series of proprietary constructs as well as we were very pleased to designate the B7-H3-SADA for potential use in prostate cancer as the first of these constructs a few weeks ago. We plan to file the first IND within the next 12 months for a SADA construct and hope to start treating patients with this exciting technology shortly thereafter. We believe the SADA technology platform makes tremendous sense for Y-mAbs, and it could potentially allow us to unlock even further potential in the field of regulated antibodies, both for specialty oncology indications and also in larger adult indications. The platform is also available for sublicensing, and we hope to see the SADA technology make significant contribution to improve the treatment landscape in radioimmunotherapy in the coming years. To support our growth plan, we have increased our headcount to a total of 89 employees during the second quarter of the year.</p>, <p>Due to the COVID-19, the increase is modest compared to prior quarters, and the growth represents addition to the development team as well as to the commercial team that is ramping up for the potential commercial launch of naxitamab and omburtamab. With the PDUFA date in late November 2020, we continue to believe that we are well positioned to move naxitamab to FDA approval and commercialization later this year. For omburtamab, we believe that we are well positioned for the potential FDA approval and commercialization in the beginning of 2021. Concurrently, we plan to increase our focus on constructs generated by the SADA technology and the earlier-stage product candidates in our pipeline, including the lutetium-label omburtamab and the bispecific antibody programs, as well as the next-in-line indications for naxitamab and omburtamab.</p>, <p>Now let me invite Bo to share his remarks on the second quarter financials.</p>, <p><strong>Bo Kruse</strong> -- <em>Vice President and Chief Financial Officer</em></p>, <p>Thank you, Claus. We reported a net loss for the quarter ended June 30, 2020, of $40.4 million or $1.01 per share, basic and diluted. This compares to a net loss of $18 million or $0.53 per share basic and diluted for the quarter ended June 30, 2019. We ended the second quarter with a cash position of $158 million compared with the 2019 year-end cash position of $207 million. As our work on the omburtamab BLA submission has progressed through the quarter and as we continue to accelerate the commercial ramp up for the potential launch of both naxitamab and omburtamab, we have seen our cash burn increase.</p>, <p>We expect the cash burn from operating expenses for the remaining quarters in 2020 to increase slightly, but remain roughly in line with last couple of quarters. With respect to the recent announcement of the SADA license, we do not expect this to have a material impact on our spending in 2020. As we take a closer look at the operating expenses for the second quarter, we note that R&D expenses have increased by $15.6 million from $14.5 million for the quarter ended June 30, 2019, to $30.1 million for the quarter ended June 30, 2020. This increase was primarily attributable to a $1.8 million increase in personnel costs and a $13.3 million increase in milestones and license fees as per the SADA agreement. In the second quarter, most of the SADA-related expenses were noncash items.</p>, <p>G&A expenses increased by $6.3 million from $4.1 million for the quarter ended June 30, 2019, to $10.4 million for the quarter ended June 30, 2020. The increase in G&A expenses primarily reflects a $1.9 million increase in personnel costs, a $3.5 million increase in expenses for the building of our commercial infrastructure related to the potential launch of our two lead product candidates, naxitamab and omburtamab, and a $0.9 million for business insurance and professional fees. Cash used in operating activities in the first half of 2020 show that the cash burn increased by $21.9 million from $27.5 million for the period ended June 30, 2019, to $49.4 million for the period ended June 30, 2020. The increase was primarily caused by the increase in net loss for the period.</p>, <p>The net loss itself increased by $32.6 million for the period ended June 30, 2020, and was partially offset by an increase in noncash expenses, including depreciation and stock-based compensation of $11.7 million. In terms of financial guidance, since the secondary offering last year, we've said that cash on hand plus net proceeds from the offering would cover our operating activities and capital expenditures through the fourth quarter of 2022. This does not take into account any potential revenues from commercialization of naxitamab and omburtamab or the proceeds from any potential future partnerships. So we believe that Y-mAbs remains in a very healthy financial position.</p>, <p>This concludes the financial update. And I'll now turn the call over to Thomas.</p>, <p><strong>Thomas Gad</strong> -- <em>Founder, Chairman, President & Head of Business Development and Strategy</em></p>, <p>Thank you, Bo. Thank you, everyone. So Donna, if you would open up for Q&A and just go through the process of how that will work.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-57739">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-57739');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Our first question is coming from Alec Stranahan of Bank of America. Please go ahead.</p>, <p><strong>Alec Stranahan</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Hey guys, thanks for taking our questions. Two from me. My first question is on the GD2-GD3 bispecific. In the first indications of relapsed/refractory neuroblastoma and osteosarcoma, is the hopes here that we'll see better safety in naxitamab in terms of the grade three pain? Or do you think we could also see a boost in efficacy given the higher potency in preclinical models? And in terms of timing of the data, I think I recall you mentioned we might see early efficacy at SIOP in the fall, but I didn't see it in the titles you listed. So any additional color there on time lines for data release would be great.</p>, <p>And then my second question is on the commercialization front. I know launch is still a few months away and things could change. But given the situation with COVID, how are you building the potential for extended social distancing and mobility issues into your approach to marketing naxitamab and omburtamab? And how are you weighing boots on the ground versus virtual interactions in your launch preparations?</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>Thanks, Alec. Just your first question to the bispecific antibody. We are still hoping that during the fall we will be able to come out with some preliminary data from the Phase I/II dose-escalation study on the bispecific antibody. And hopefully also some preliminary indication of both safety and efficacy. The idea is that due to the lower doses that we are using that we potentially could see less pain side effects with this. The patients that we are putting on study is patients that have already progressed while having received GD2 antibody, although we have a fantastic naxitamab GD2 antibody, you will recall for second-line patients that are secondary refractory, we only have about if you include those, we can put in remission in combination with chemotherapy, about 60% of the patients to come into remission, which also tells you that the remaining 40% are still not in remission. So there is a significant unmet need still for those patients.</p>, <p>And of those 60% that does come in to remission approximately, if you look at Dr. Kushner's data from SIOP last year, you will see that the two year progression-free survival for those that are coming to remission are about 37%. So there's clearly still more to be done for these kids. So if the bispecific antibody could help out, initially, it will be developed for those that are not staying in remission after first or second relapse. And then, of course, you would try to advance it and see if you use it in earlier stage, you can actually keep patients more patients in remission for a longer time and put more patients in remission with the product. And for the osteosarcoma patients, the thing is, today, there's nothing approved for patients that are beyond frontline treatment in osteosarcoma.</p>, <p>So that's definitely an unmet medical need there. And then and I know we have at least three or four osteosarcoma patients on the study, and we are looking very much forward to see how that progresses. In terms of the commercialization, well, we're definitely paying attention to the issue with COVID-19, and we are preparing to do a virtual launch. Right now, there's a limit to how much that can be done. It seems to be our experience monitoring what other people are doing that physicians are very open, in particular, to new products coming to the market to do virtual interviews and presentations. So we are preparing for that situation that we may not be able to put feet on the ground in the hospitals, but have to do the launch virtually. So I was discussing this and have been discussing this a number of times with Phil heading the commercial team. So he's perfectly prepared for that situation also.</p>, <p>Did that answer your question?</p>, <p><strong>Alec Stranahan</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Yes. That's perfect. And congrats on all the progress.</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>Thank you.</p>, <p><strong>Alec Stranahan</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Thank you.</p>, <p><strong>Operator</strong></p>, <p>Our next question is coming from Etzer Darout of Guggenheim. Please go ahead.</p>, <p><strong>Etzer Darout</strong> -- <em>Guggenheim -- Analyst</em></p>, <p>Hi, thanks for taking the question. I guess the first one on just Danyelza and Omblastys. If you could maybe provide some commentary on access, pricing and reimbursement, conversations that you're having with payers and how sort of you're kind of communicating what you've kind of characterized as optimal pricing. And then just secondly, if you could maybe give a little bit more color on the data you've seen for omburtamab in adults and sort of how that may be kind of read through to the lutetium product that you're advancing in adult patients.</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>Well, thanks for the questions. And in terms of pricing, it's difficult for me right now to give you any details on the pricing. We have previously discussed some ballpark figures where you could expect the pricing to end. But I think I have nothing further right now until but I would in terms of price resistance, I have to say that we're not meeting any. And it doesn't matter which kind of price level we are discussing within the levels where other people for these very expensive niche products are selling right now. So I don't foresee any issues with pricing. Remember, for omburtamab, we are taking a group of kids where everybody is historically expected to die from the disease and we cure 50% of them.</p>, <p>I think it's very hard not to start arguing about pricing as long as you stay within a reasonable amount of cost. In so that's as much on the pricing. And the other question was omburtamab in adults. And we presented some preliminary data from the iodinated version. I mean many of these patients that went on the iodinated omburtamab for CNS/leptomeningeal metastases for ovarian cancer and for melanoma and sarcomas, etc. that we have on the study, were really terminal when they came on to the protocol. I remember the woman with the ovarian cancer had 14 metastases that was visible on her scans when we put on. And nevertheless, she lived for 1.5 year, which is, I would say, unprecedented.</p>, <p>There's no doubt that you need to come as quickly as possible if you want to get full benefit of a treatment like the omburtamab lutetium. So like for the kids we put on this treatment, where we get these fantastic results, remember, before they come on the treatment, they receive standard of care, which is induction chemo, surgery and radiation to their tumors in the brain. After that, their expected median survival is six months from diagnosis of CNS disease and their expected three year overall survival is 10%. So these patients are receiving optimal treatment.</p>, <p>If I'm the patients that we will put on the adult protocol will be those that say, that have a melanoma relapsing in the brain, they will also receive induction chemo with temozolomide and maybe some irinotecan. And then they will get surgery for the lesions that are visible, and then they will get whole brain radiation probably 25 grade total. And after that, most of the patients will be NED. And nevertheless, the likelihood that they will be alive 12 months later is 15%. So those patients just after they finish that would be optimal to put on this.</p>, <p>Based also on the experience we have, we have treated a number of melanoma patients. And again, as I said, most of them come at a time point where there's no other alternatives and they have received whatever palliative care they could receive. I hope that answers your question to the extent...</p>, <p><strong>Etzer Darout</strong> -- <em>Guggenheim -- Analyst</em></p>, <p>No great, yes. And congrats on all the progress.</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>Thank you very much.</p>, <p><strong>Etzer Darout</strong> -- <em>Guggenheim -- Analyst</em></p>, <p>Thank you.</p>, <p><strong>Operator</strong></p>, <p>Our next question is coming from Robert Burns of H.C. Wainwright. please go ahead.</p>, <p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p>, <p>Hi guys, thanks for taking my questions and Congrats on the progress. Just a few from me, if I may. So since you're advancing both the GD2 bispecific and GD2-SADA assets, could you discuss the potential overlap of these assets? And in what setting do you believe each is likely to be preferentially used? As well as whether you see any profitability for cannibalization of the others' revenue potential, particularly in SCLC? And then I have one more after that.</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>Okay. So first, well, of course, there is a potential that one of them could cannibalize the other one. But remember, one is right now in the early preclinical testing, meaning we are getting ready for tox studies. It will probably enter clinic by the middle of next year, third quarter next year. That's the SADA construct. The other one is ready to start three Phase II studies later this year.</p>, <p>And when we started this development, we didn't have the SADA technology, and we don't know how the SADA technology will work in patients. Remember, it's never been in patients before. But if the SADA technology works, the way I believe it's working, it's going to be the biggest game changer that we have seen in oncology for the last 30 years. And then it's going to completely compete out the bispecifics. Then it has the potential to compete out basically anything. The SADA constructs are only dependent on the receptor on the cancer cells. As long as you can identify something that is selectively, to some degree, expressed not even on all the cancer cells because radiation from lutetium penetrates like one to 1.5 millimeters in cancer tissue.</p>, <p>So you get a ton of bystander effect from these radiolabeled constructs. Whereas a bispecific antibody is dependent on T cell activation, a naked antibody like naxitamab is dependent on NK cells and macrophages and ADCC activation. These constructs, even if I take a late-stage patient that have been through 4, five different regimens of cancer therapy, has no immune system that's really working anymore, but the cancer is still expressing the target and the patient has hundreds of micrometastases, my SADA construct will still work, it's just going to go in there and eat it.</p>, <p>So if the SADA works, I would agree that it could potentially cannibalize anything that naxitamab and the bispecific GD2. But I've been long enough in this industry to know that you should not abandon the stuff that you have coming to the market just because you believe that something in your research lab looks more interesting. But it shouldn't stop us from pushing that forward. And I have to say, and I've said it many times already now, I'm extremely excited about our SADA technology. It is really the best stuff I've seen since I started working with antibodies back in the 1980s in a different venue. Did that answer the question?</p>, <p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p>, <p>Oh, it certainly did. I certainly look forward to the whole SADA constructs. One more from me. So considering that Y-mAbs is eligible to receive a PRV upon approval of naxitamab and omburtamab, have you already lined up potential buyers for them?</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>We have lined up some people that will help us make sure we get the best possible price for it. So but I know also from one of these said that the last two ones that they were involved in selling took three to four weeks to sell. And you may have seen that there was another one that was sold about a week ago for $100 million.</p>, <p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p>, <p>Yes, that seems to be what they're going for, roughly. Claus, congrats again on the progress.</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, <p>Thanks a lot, Rob.</p>, <p><strong>Robert Burns</strong> -- <em>H.C. Wainwright -- Analyst</em></p>, <p>Thank you.</p>, <p><strong>Operator</strong></p>, <p>Our next question is coming from David Lebowitz of Morgan Stanley. Please go ahead.</p>, <p><strong>David Lebowitz</strong> -- <em>Morgan Stanley -- Analyst</em></p>, <p>Thank you very much for taking my question. Given that you have two BLAs that are currently in progress, have you had any discussions with the agency regarding how facility inspections will be conducted for both applications?</p>, <p><strong>Claus Juan Moller San Pedro</strong> -- <em>Chief Executive Officer & Director</em></p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-98332", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["YMAB"], "primary_tickers_companies": ["Y-mAbs Therapeutics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "YmAbs Therapeutics, Inc. (YMAB) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 34, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-98332"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-98332", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["YMAB"], "primary_tickers_companies": ["Y-mAbs Therapeutics, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "YmAbs Therapeutics, Inc. (YMAB) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 34, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | YMAB earnings call for the period ending June 30, 2020. | Good morning, and welcome to the Y-mAbs Therapeutics, Inc. Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. Let me quickly remind you that the following discussion contains certain statements that are considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Because forward-looking statements involve risks and uncertainties, they are not guarantees of future performance, and actual results may differ materially from those expressed or implied by these forward-looking statements due to a variety of factors, including those factors discussed in the company's annual report on Form 10-K for the fiscal year ended December 31, 2019, as well as with the SEC on March 12, 2020, and in the company's sequentially filed SEC reports.\n At this time, I would like to turn the conference over to Mr. Thomas Gad, the company's Founder, Chairman and President. Please go ahead, sir.\n Thank you, Donna. Thank you, everyone, and good morning, and thanks for joining us today. I hope I go through loud and clear. I know we had a storm, but the lines are up and running. So despite the COVID-19, the second quarter of 2020 has been very strong for Y-mAbs. We believe we've made significant progress on executing our strategy and taking steps that will position us very well for the potential product launches of our two lead product candidates, naxitamab and omburtamab. As you know, we have completed the submission of the naxitamab BLA in March and received a PDUFA date for November of this year. And in addition, the submission of the omburtamab BLA to the FDA was completed earlier this week.\n We ended the second quarter with approximately $158 million in cash. So we believe we have a strong balance sheet to support the potential launch of both naxitamab and omburtamab, while at the same time achieving our development pipeline. We believe that our cash position will carry us through the end of 2022 without taking into consideration any product sales or potential partnership income. And we're very pleased with our financial position, which Bo will talk about later on this call.\n As a company, we always work very hard to stay tuned to our position as a leader in pediatric oncology, addressing clear unmet medical need and focusing on advancing our therapies to reach the lives of children living with these rare cancers. Concurrently, it's pleasing to see our pipeline and technology platform widen its reach into adult patient populations, with lutetium-labeled omburtamab will soon be tested in adult B7-H3-positive cancers and the GD2 biospecific scheduled to enter Phase II in small cell lung cancer later this year.\n We're also very excited about our new licensing agreement with MSK and MIT, which we entered into in April to expand our antibody platform with the SADA technology. We believe the SADA technology represents a new approach to pretargeted radioimmunotherapy, which we refer to as liquid radiation. And SADA may have potential to improve the current treatment landscape in oncology since it appears to enhance the therapeutic index of payload delivery. We believe SADA's technology appears to be very promising and may be able to take radio-conjugated antibody constructs to a new level and potentially open up for much broader usage than any other radiolabeling technology in the antibody area.\n We expect to deploy the SADA technology in a range of adult tumors as well as pediatrics. And our targets include in HER2 for breast cancer, B7-H3 for prostate cancer and GPA33 for colon cancer, thereby adding further exposure for the company in adult patient populations. I'm also very happy to announce that Laura Hamill has joined our Board of Directors. Laura has extensive experience in the industry with over 30 years of global commercial experience and a rarity of executive leadership position, most recently as Executive Vice President at Gilead. Laura adds significant commercial expertise to our Board, which will be a great value to our plans for commercial organization and bring our product candidates to patients. And today, obviously we'll hear remarks from Dr. Claus Moller, our CEO; and Bo Kruse, our Chief Financial Officer.\n And I will hand it over to Claus now. Thank you.\n Thank you, Thomas, and welcome again to Y-mAbs Therapeutics Second Quarter 2020 Earnings Call. We are very pleased that you have chosen to spend this morning with us. Let me start by saying that we continue to closely monitor the impact of COVID-19 on our business. We have implemented a number of measures to protect the health and safety of our employees, while also taking steps to mitigate potential disruption to our supply chain and continue our clinical trials and planning of commercial activities.\n While we have seen some near-term impact on clinical trial site initiation and patient enrollment, we have not changed our guidance for key anticipated 2020 clinical data readouts. To date, we are pleased with the continuity of our business and our ability to support the critical need of cancer patients in our ongoing trials. We will keep you updated as appropriate going forward. During the second quarter, we have continued to work hard to ensure that our two lead product candidates, naxitamab and omburtamab, advance toward the market. For naxitamab, as you will recall, we completed the BLA for naxitamab in March this year, and we have now received the PDUFA date November 30 this year. And had a number of dialogues with the agency and are still confident that we will be able to stick to this plan.\n The BLA is for treatment of patients with relapsed/refractory high-risk neuroblastoma in bone and bone marrow. The BLA submission is based on the safety and efficacy results of the pivotal studies called 201 and 12-230, which we expect to present data from at a suitable venue later this year. In terms of post-marketing commitments, we are aiming for a two year progression-free survival for the planned patients from the Study 201, and in addition to the ones that were in the filing. In addition to the BLA for naxitamab, we have trials ongoing in Barcelona and at MSK for first-line neuroblastoma as well as chemo-combination trials for refractory neuroblastoma patients. During the remainder of 2020, we expect to initiate an international Phase II multicenter trial for naxitamab in both frontline and with chemo-combination treatments.\n Now let me jump to omburtamab, our lead our second lead compound. We had the pre-BLA meeting with the FDA in February this year, and we're very pleased to have our plans confirmed by the agency for the BLA. We initiated the rolling BLA in June and completed the BLA submission earlier this week for the treatment of patients with CNS/leptomeningeal metastases from neuroblastoma. This is a few weeks later than we had originally anticipated back in February after the pre-BLA meeting, but before the COVID-19 started to affect our activities. However, we are very pleased to have the in-house competence to work and coordinate the submissions of another BLA filing only four months after the completion of the submission of the naxitamab BLA, and we will continue to keep you posted on our progress.\n We are hoping to confirm a post-marketing commitment showing three year overall survival from 32 patients from the Study 101 to be significantly better than a 10% overall survival reported historically. We will present preliminary data from the pivotal 101 study in CNS/leptomeningeal metastases from neuroblastoma at SIOP later this year. That's in October. In addition to the U.S. development program, we are making good progress in Europe and we plan to submit a marketing authorization application for omburtamab within the next six months. This is a vital step forward in our efforts to potentially bring omburtamab to the market in Europe in 2021.\n As previously discussed, we're also developing omburtamab for diffuse intrinsic pontine glioma, known as DIPT, in a Phase I study at MSK, and we are planning to open a multicenter Phase II study for DIPT patients in 2020. For desmoplastic small round cell tumors, also known as DSRCT, we have recently opened a Phase II study at MSK. For our lutetium-177 labeled omburtamab-DTPA construct, we are planning to open a multicenter Phase I/II study in pediatric medulloblastoma next month. And we also plan to open a second Phase I/II study, which will be a basket study for B7-H3-positive CNS/leptomeningeal metastases in adult patients later this year. For both studies, we hope to utilize our prior experience of treating patients these indications with the iodinated 131-iodine omburtamab. I'm very pleased to see the second-generation omburtamab entering the clinic very soon.\n On the commercial standpoint, we believe that we are very much on track to build the rightsized, best-in-class commercial organization in time for the potential approvals of both naxitamab and omburtamab. Should the potential naxitamab approval even come before the PDUFA date, we will also be prepared for that. Given the small universe of pediatric cancer centers that treat the majority of the neuroblastoma patients, we believe that we can build a lean and highly targeted commercial organization and launch both compounds ourselves. Our commercial team is largely in place. As many of you know, we hired our Chief Commercial Officer, Phil Herman, more than two years ago, and we have been building his team ever since.\n In addition, we have medical science license and medical affairs groups in place, so we believe we are positioned very well for the potential the launch of naxitamab and omburtamab in the U.S. market. Since European marketing application for omburtamab is potentially only about six months behind the U.S., we plan to begin staffing our European commercial operations toward the end of 2020. The SADA technology that Thomas also mentioned briefly was licensed in April. It's an agreement with Memorial Sloan Kettering Cancer Center and Massachusetts Institute of Technology for a worldwide exclusive license and research collaboration to develop the antibody construct based on the SADA molecule self-assembling/disassembling antibody constructs. It's a radioimmunotherapy platform. We also refer to the SADA platform to as liquid radiation.\n The SADA platform operates in a two-step manner. In the first step, a saturating dose of tumor-targeted, unlabeled, bispecific antibody fragment is injected. These bispecific antibody fragments are self-assembled in-vitro prior to the injection into tetramers and subsequently bind to the tumor cells. After a few hours, excess tumor-targeted antibody constructs that have not bound to the targeted tumor cells disassemble due to the dilution in serum into smaller antibody fragments that are then subsequently excreted quickly through the kidneys. In the second step, the next day, when the concentration of antibody constructs not bound to the tumor is at its peak and much higher than in normal organs, a radiolabel compound that binds to the other end of the bispecific constructs, the DOTA binding part, is injected.\n In published papers utilizing similar approaches, data indicate that this two-step process results in a much higher tumor/nontumor concentration ratio, which we believe is favorable for radiotherapy since it substantially minimizes the radiation damage to healthy tissues. We believe SADA potentially could improve the efficacy of radiolabeled therapeutics in tumors that have not historically demonstrated meaningful responses to radiolabeled agents, i.e., tumors with multiple microscopic lesions, larger than three or four centimeters in diameter, as it appears to subsequently allow a higher radioactivity level to be injected without impairing the hematological toxicity. We have initiated development of a number of SADA-based constructs created by MSK, including GD2-SADA for GD2-positive solid tumors, a GPA33-SADA for potential use in colon cancer and HER2-SADA for potential use in breast cancer.\n And we expect to advance a series of proprietary constructs as well as we were very pleased to designate the B7-H3-SADA for potential use in prostate cancer as the first of these constructs a few weeks ago. We plan to file the first IND within the next 12 months for a SADA construct and hope to start treating patients with this exciting technology shortly thereafter. We believe the SADA technology platform makes tremendous sense for Y-mAbs, and it could potentially allow us to unlock even further potential in the field of regulated antibodies, both for specialty oncology indications and also in larger adult indications. The platform is also available for sublicensing, and we hope to see the SADA technology make significant contribution to improve the treatment landscape in radioimmunotherapy in the coming years. To support our growth plan, we have increased our headcount to a total of 89 employees during the second quarter of the year.\n Due to the COVID-19, the increase is modest compared to prior quarters, and the growth represents addition to the development team as well as to the commercial team that is ramping up for the potential commercial launch of naxitamab and omburtamab. With the PDUFA date in late November 2020, we continue to believe that we are well positioned to move naxitamab to FDA approval and commercialization later this year. For omburtamab, we believe that we are well positioned for the potential FDA approval and commercialization in the beginning of 2021. Concurrently, we plan to increase our focus on constructs generated by the SADA technology and the earlier-stage product candidates in our pipeline, including the lutetium-label omburtamab and the bispecific antibody programs, as well as the next-in-line indications for naxitamab and omburtamab.\n Now let me invite Bo to share his remarks on the second quarter financials.\n Thank you, Claus. We reported a net loss for the quarter ended June 30, 2020, of $40.4 million or $1.01 per share, basic and diluted. This compares to a net loss of $18 million or $0.53 per share basic and diluted for the quarter ended June 30, 2019. We ended the second quarter with a cash position of $158 million compared with the 2019 year-end cash position of $207 million. As our work on the omburtamab BLA submission has progressed through the quarter and as we continue to accelerate the commercial ramp up for the potential launch of both naxitamab and omburtamab, we have seen our cash burn increase.\n We expect the cash burn from operating expenses for the remaining quarters in 2020 to increase slightly, but remain roughly in line with last couple of quarters. With respect to the recent announcement of the SADA license, we do not expect this to have a material impact on our spending in 2020. As we take a closer look at the operating expenses for the second quarter, we note that R&D expenses have increased by $15.6 million from $14.5 million for the quarter ended June 30, 2019, to $30.1 million for the quarter ended June 30, 2020. This increase was primarily attributable to a $1.8 million increase in personnel costs and a $13.3 million increase in milestones and license fees as per the SADA agreement. In the second quarter, most of the SADA-related expenses were noncash items.\n G&A expenses increased by $6.3 million from $4.1 million for the quarter ended June 30, 2019, to $10.4 million for the quarter ended June 30, 2020. The increase in G&A expenses primarily reflects a $1.9 million increase in personnel costs, a $3.5 million increase in expenses for the building of our commercial infrastructure related to the potential launch of our two lead product candidates, naxitamab and omburtamab, and a $0.9 million for business insurance and professional fees. Cash used in operating activities in the first half of 2020 show that the cash burn increased by $21.9 million from $27.5 million for the period ended June 30, 2019, to $49.4 million for the period ended June 30, 2020. The increase was primarily caused by the increase in net loss for the period.\n The net loss itself increased by $32.6 million for the period ended June 30, 2020, and was partially offset by an increase in noncash expenses, including depreciation and stock-based compensation of $11.7 million. In terms of financial guidance, since the secondary offering last year, we've said that cash on hand plus net proceeds from the offering would cover our operating activities and capital expenditures through the fourth quarter of 2022. This does not take into account any potential revenues from commercialization of naxitamab and omburtamab or the proceeds from any potential future partnerships. So we believe that Y-mAbs remains in a very healthy financial position.\n This concludes the financial update. And I'll now turn the call over to Thomas.\n Thank you, Bo. Thank you, everyone. So Donna, if you would open up for Q&A and just go through the process of how that will work.\n | YmAbs Therapeutics, Inc. | (NASDAQ:YMAB) | Aug 7, 2020 | 9:00 a.m. ET | 9 | am | 2020-08-07 | 2020-08-07 | 2020-08-06 | 2020-08-10 | NASDAQ | I know we had a storm, but the lines are up and running. | I know we had a storm, but the lines are up and running. | [0.04638134 0.5468527 0.406766 ] | negative | -0.500471 | 2020-08-10 | 38.570000 | 40.980000 | 37.549999 | 38.029999 | 141277.0 | 38.230000 | 40.360001 | 38.230000 | 40.000000 | 109221.0 | Biotechnology | 2020-06-30 | 2020-06-30 | -1.01 | -0.689071 | 2020-06-30 | YMAB | -0.320929 | miss | 1.430000 | increase | 1 | positive |
| 595 | YY | /earnings/call-transcripts/2020/08/13/joyy-inc-yy-q2-2020-earnings-call-transcript/ | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>JOYY Inc</strong> <span class="ticker" data-id="273778">(<a href="https://www.fool.com/quote/nasdaq/yy/yy/">NASDAQ:YY</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 13, 2020</span>, <em id="time">9:00 p.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the JOYY Inc.'s Second Quarter 2020 Earnings Call. [Operator Instructions] After the management's prepared remarks, there will be a question-and-answer session. [Operator Instructions].</p><p>I'd now like to hand the conference over to your host today, Mr. Matthew Zhao, the company's General Manager of Investor Relations. Please go ahead, Matthew.</p><p><strong>Matthew Zhao</strong> -- <em>General Manager of Investor Relations</em></p><p>Thank you, operator. Good morning and good evening, everyone. Welcome to JOYY's second quarter 2020 earnings conference call. Joining us today are Mr. David Xueling Li, Chairman and CEO of JOYY; CFO, Mr. Bing Jin; and COO, Ms. Ting Li.</p><p>For today's call, management will first provide a review of the quarter, and then we will conduct a Q&A session. The second quarter 2020 financial results and webcast of this conference call are available at ir.yy.com. A replay of this call will also be available on our website in a few hours.</p><p>Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which apply to this call as we will make forward-looking statements. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.</p><p>I will now turn the call over to our Chairman and CEO, Mr. David Xueling Li. Please go ahead, sir.</p><p><strong>David Xueling Li</strong> -- <em>Chairman and Chief Executive Officer</em></p><p>Thank you, Mathew.</p><p>[Foreign Speech]</p><p>Hello, everyone. Welcome to our second quarter 2020 Earnings Call.</p><p>[Foreign Speech]</p><p>Before we jump into details about the business development in order to provide everyone with a better picture of our quarterly performance, I would like to remind you that starting from this quarter we have deconsolidated Huya's financial results and listed them as discontinued operations. Such deconsolidation applies to both current quarter and historical comparative period.</p><p>[Foreign Speech]</p><p>In light of the rapidly changing market dynamics due to the COVID-19 and recent geopolitical uncertainties, we have been actively reviewing our global dual-engine growth strategy. Our conclusions are three-fold. First, we remain committed to global expansion. Although our business in certain countries experienced some setbacks due to local regulatory changes, we believe such setbacks are temporary as we are convinced that the movement toward worldwide activity is irresistible. Not only does globalization lead to streamlining of information exchange, emergence of innovative technologies and replication of successful business models across geographic boundaries, it also unleashed the power of Internet to boost productivity and raise living standards.</p><p>We are at the forefront of this globalization wave and we intend to ride it out deftly and profitably. For example, through Bigo Live, our global live streaming platform, we plan to expand to more regions and further reduce reliance on any single market. As Bigo Live's user base expands, we will remain focused on developing a highly integrated ecosystem for social and entertainment live streaming. We believe Bigo Live has the potential to generate four times as much revenue as YY Live over the next few years.</p><p>[Foreign Speech]</p><p>Secondly, we continue to advance our local operations in response to growing geopolitical tensions and to ensure our full compliance with changing regulations in terms of content, product and operation. We proactively engage in frequent dialog with various local authorities in every one of the geographic regions we operate. Because Bigo Live is headquartered in Singapore, we have been under the Singaporean jurisdiction since inception. We have also maintained its operation independently out of China, even after our completion of its acquisition in 2019.</p><p>Going forward, we plan to hire more local employees and boost their contribution to Bigo. As we leverage our network of over 30 localized operations around the world, the breadth and depth of our global operation increases and our operational and financial performance enchances accordingly.</p><p>[Foreign Speech]</p><p>Thirdly, we firmly anchored our competitive advantage in video content and video services. We believe that video has become the mainstream medium for disseminating information over the Internet. We are also convinced that for the coming generations of Internet users, video will become the dominant format for social networking, content production and content resumption. Therefore, we plan to diversify our monetization capability to advancement in live streaming, short-form video and video-based information sharing.</p><p>Furthermore, we plan to enhance our monetization capability in areas including advertisement and e-commerce. As a precursor to our expenditure into e-commerce, we made a strategic investment in Tongcheng Life this quarter. We believe that we will be able to generate recurring revenue from live streaming, advertising and e-commerce as our global user base grows.</p><p>[Foreign Speech]</p><p>Executing the three aforementioned growth strategies, we achieved solid operational performance during the second quarter of 2020. As a result of our extensive global presence and localized operations, we are well positioned to help people around the world to combat COVID-19. In May, we launched a 24-hour non-stop global charity concert online harnessing the strength of global -- Bigo's global community, the concert featured more than 100 live streaming hosts in over 20 countries, attracted close to 4 million viewers around the world, and raised more than $100,000 of donation to the World Health Organization's COVID-19 Solidarity Response Fund.</p><p>An event on such a worldwide scale is made possible only through a truly global social platform like Bigo. It also be extended by Bigo's unique combination of globalization and localization capabilities. Besides the online charity concert, we also joined hands with live streaming hosts around the world to launch a series of online activities to bring comfort and joy to our users in need. For example, to help local communities stay fit and healthy at home, we launched the STAYATBIGO campaign that features informational seminars by healthcare professionals, entertainment performance by local music DJ and workout sessions by fitness enthusiasts.</p><p>[Foreign Speech]</p><p>Our ability to serve the various local communities around the world not only enhances our brand recognition in local markets but also boosts our operating and financial results. Despite the uncertain and challenging macro environment during the second quarter, we grew our net revenues by 36.3% year-over-year to RMB5.84 billion, in particular, Bigo's live streaming revenues grew by 158.8% year-over-year to RMB2.95 billion, contributing more than half of the group's total live streaming revenues for the first time ever. Bigo Live's mobile MAUs increased by 41.3% year-over-year and 10% quarter-over-quarter to 29.4 million with paying user base also grew as a result of our efforts in cultivating users' paying habits on the platform.</p><p>[Foreign Speech]</p><p>In addition, Bigo Live's healthy growth is also attributable to our diligent efforts in nurturing users' habitual use of live steaming as a medium for both entertainment and socialization. During the quarter, for example, we optimized our social interaction features called BAR to continuously intensify Bigo Live's highly engaging and interactive nature. BAR enables users to -- and hosts to share updates with one another in a increasingly frictionless manner. As a result, over 50% of Bigo Live's users accessed BAR during the second quarter. In addition, through live streaming showrooms or BAR's synchronized friend circle, each Bigo Live user follow 11 hosts on average, representing a significant increase over the previous quarter.</p><p>[Foreign Speech]</p><p>On the short-form video front, we focused our efforts on cultivating Likee's global ecosystem, diversifying its content offerings, refining its product features and synchronizing expansion with local market characteristics. As a result, Likee's total MAUs surged by 86.2% year-over-year and 14.2% quarter-over-quarter to 150.3 million in the period. We also continued Likee's geographical expansion by deepening its foothold in key markets such as Russia and Indonesia. Notably, Likee's total MAU in Russia almost doubled year-over-year in the period.</p><p>[Foreign Speech]</p><p>As Likee's brand influence becomes increasingly pervasive and as its user base expands continuously, we are actively exploring various innovative marketing initiatives to help it penetrate into younger generation. In May, for example, Likee cooperated with a series of fashion and cosmetics brands in Russia to launch a thematic short-form video challenge for beauty festivals. Leveraging our state-of-the-art technology, we developed special impact templates and customized interactive gameplay features for the campaign to boost its user participation and enthusiasm. As a result, the event struck a societal nerve, enticed a large number of female Russian users to voluntarily create and share short-form videos and generated more than 200 million cumulative views on the platform, thus making a perfect stage for bolstering our partner's brand exposure in the local market.</p><p>[Foreign Speech]</p><p>Now, let me share some updates on HAGO. By focusing on local monetization initiatives with favorable ROI, we delivered significant revenue growth in the period. HAGO's MAUs also remained relatively stable at 31.7 million. As we continue to explore different methods of bolstering HAGO's long-term user value, we were able to further enhance its social nature, strengthen its user connection and develop additional context for user interactions. Meanwhile, to cater to the younger generation preferences, we have expanded its content offering with comedy, dance and music performances.</p><p>In addition, we continue to update HAGO's product features with cutting-edge technology. For example, by integrating data analysis with AI-algorithm, we optimized HAGO's content recommendation system, so that it can match content with individual user's interest more precisely. Moreover, our user data analytics has led us to upgrade a number of features in HAGO such as party chat room and user groups in order to enhance user experience, stimulate social interaction, improve user community and group penetration, enhance HAGO's social nature and increase its user stickiness.</p><p>[Foreign Speech]</p><p>Last but not the least, on the domestic front, we fortify our leadership in China's live streaming entertainment industry and expanded our live streaming offerings during the quarter. After our live streaming celebrity variety show, Idol Friday, became a smach hit upon launch has continued to attract additional viewers in the second quarter. Building upon our success with Idol Friday and other variety shows, we launched a new program called Let's Sing. Similar to Idol Friday, Let's Sing has created a virtual stage for professional musicians to broadcast their performances online, while engaging in real time online chats with their fans. It is well suited to facilitate social interactions among users, hosts and guests. As it's combination of music talent, celebrity charm and live interaction proved especially attractive to audiences, we plan to replicate its formula for success to other future endeavors.</p><p>[Foreign Speech]</p><p>To ensure a steady flow of premium live streaming content on YY Live, we further expanded the variety of our content offerings during the second quarter. For example, we introduced customized support initiatives to help high quality celebrity launch their own personalized live streaming channels. The effectiveness of such incentives has led to the formation of several partnership with professional chess players on YY Live. Top chess players from prestigious institutes, such as the National Chess Academy can now invite YY Live users to participate in online games, while providing play by play professional narratives through live streaming. As user intrigued with this special type of live streaming content growth, so that the popularity of our chess-related live streaming at a rapid pace.</p><p>[Foreign Speech]</p><p>In addition, as we advanced each of our businesses and full value, we are always looking for ways to increase returns to our shareholders. This quarter, our Board of Directors approved a quarterly dividend policy for the next three years. Under this policy, quarterly dividend will be set at approximately $25 million in each fiscal quarter. As always, we appreciate and value the long-term support from our shareholders and we are always devoted to maximizing the interest for our shareholders.</p><p>[Foreign Speech]</p><p>In summary, we firmly upheld our dual-engine growth strategy during the quarter. We upgraded our platforms, localized operation and brought joyful experiences to people around the world. Despite the macroeconomic uncertainties caused by COVID-19, we remain confident in our business model's underlying strength and favorable outlook. Our long-term business plan remains intact. We continue to work tirelessly to build our global live streaming and short-form video ecosystem. We remain fully committed to serving our users, delivering shareholder value and constructing a truly global video-based social media platform for all.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>That concludes David's prepared remarks. Now, as JOYY's CFO, I will talk about the financial results. Please be noted that the financial information and non-GAAP financial information disclosed in our second quarter earnings press release is presented on a continuing operations basis unless otherwise specifically stated. After the deconsolidation of Huya, the company accounts for our investment in Huya as an equity method investment and apply the equity method accounting one quarter in arrears to enable us to provide financial disclosures independent of the reporting schedule of Huya.</p><p>During the second quarter of 2020, we maintain our strong momentum and delivered robust financial and operational performances. Our total net revenues for the second quarter increased by 36.3% year-over-year to RMB5.84 billion, exceeding both the high end of our previous guidance range and Street consensus. In particular, our live streaming revenues for the second quarter increased by 40.1% year-over-year to RMB5.61 billion, driven by live steaming revenues growth on Bigo segment.</p><p>Other revenues in the second quarter decreased by 18% to RMB232.3 million, primarily due to the decrease in other revenues in YY segment. Cost of revenues for the second quarter increased by 50.8% year-over-year to RMB3.77 billion. Revenue sharing fees and content costs increased to RMB2.6 billion in the second quarter from RMB1.79 billion in the same period of 2019, which was in line with the increase in live streaming revenues.</p><p>Bandwidth costs increased to RMB280.7 million from RMB228.1 million in the same period of 2019 as the overseas user base and time spent continued to expand following the consolidation of Bigo. Gross profit for the second quarter increased by 16% year-over-year to RMB2.07 billion. Gross margin in the second quarter of 2020 decreased to 35.5% from 41.7% in the same period of 2019.</p><p>The gross margin contraction was primarily caused by the fact that Bigo segment had lower gross margin but contributed significantly greater portion of net revenues in the second quarter of 2020, compared with the same period last year. Operating expenses for the second quarter increased to RMB2.02 billion from RMB1.79 billion in the same period of 2019. Sales and marketing expenses decreased to RMB909.8 million in the period from RMB979.9 million in the same period of 2019, primarily due to the company's less spending in sales, marketing initiatives in overseas markets due to the COVID-19.</p><p>Our R&D expenses for the second quarter increased to RMB693.5 million from RMB550 million in the same period of 2019, mostly due to the increase in headcount and investments in talent recruitment as part of the company's efforts to enhance its research and development capabilities. Our GAAP operating income for the second quarter was RMB95.2 million, compared to RMB4.3 million in the same period of 2019. Operating margin for the second quarter increased to 1.6% from 0.1% in the prior year period, primarily due to narrowing operation loss of Bigo segment.</p><p>Our non-GAAP operating income for the second quarter, which excludes share-based compensation expenses, amortization of intangible assets from business acquisitions, as well as impairment of goodwill and investments, and gain on disposal of subsidiaries and business, increased by 24.6% to RMB509.3 million from RMB408.7 million in the same period of 2019. Our non-GAAP operating margin for the second quarter was 8.7% compared to 9.5% in the same period of 2019.</p><p>GAAP net income from continuing operations attributable to controlling interest of JOYY Inc. for the second quarter of 2020 was RMB619.4 million compared to net loss of RMB6.1 million in the same period of 2019. Net margin was 10.6% in the second quarter of 2020, compared to negative 0.1% in the corresponding period of 2019, mainly due to the income from fair value change in investment.</p><p>Non-GAAP net income from continuing operations attributable to controlling interest of JOYY Inc. increased by 38.3% to RMB493.6 million from RMB357 million in the same period of 2019. Non-GAAP net margin increased to 8.5% in the second quarter of 2020 from 8.3% in the same period of 2019.</p><p>Diluted net income from continuing operations per ADS in the second quarter of 2020 was RMB7.39 compared to diluted net loss from continuing operations per ADS RMB0.28 in the same period of 2019. Non-GAAP diluted net income from continuing operations per ADS increased by 27.2% to RMB5.57 from RMB4.38 in the same period of 2019.</p><p>In addition, as David mentioned in his prepared remarks, we are pleased to report that our Board of Directors has approved a quarterly dividend policy for the next three years. Under the policy, quarterly dividends will be set at approximately $25 million in each fiscal quarter. Accordingly, we will be distributing a dividend of $0.31 per ADS in the second quarter of 2020.</p><p>Looking forward to the third quarter of 2020, we expect our net revenues to be between RMB5.85 billion and RMB6 billion, excluding the revenue contribution from Huya in the same period of last year, representing a year-over-year increase between 26.7% to 29.9%. We currently have limited visibility surrounding COVID-19 epidemic's long-term impacts and geopolitical uncertainties on our business and the market in which we operate. Therefore, this forecast only reflects our current and preliminary views on the market and operational conditions which are subject to change. That concludes our prepared remarks.</p><p>Operator, we would now like to open up the call to questions.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-98079">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-98079');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Thomas Chong from Jefferies. Please go ahead.</p><p><strong>Thomas Chong</strong> -- <em>Jefferies -- Analyst</em></p><p>[Foreign Speech]</p><p>Thanks management for taking my questions. I have -- and congratulations on the strong results for Bigo. I have two questions. My first question is about the second half outlook for Bigo, in particular, how we should think about the business trend in developed and emerging market in the second half? And my second question is about the competitive landscape. How should we bring above our competitive position for Likee and Bigo Live in coming years? Thank you.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>Thank you, Thomas. This is Bing. Let me address the question. So, regarding the second half performance forecast of Bigo, we think Bigo is well balanced across different regions and we -- if you look at the second quarter performance, it's 148% year growth which is very tremendous. We expect that growth momentum to continue. So, we will raise up our full year guidance for Bigo's total revenue, which previously we communicated to the market is around 65%, 70% year-on-year growth.</p><p>Right now, judging from the recent performance and taking into account of the labor situation across the world, we think Bigo can generate somewhere close to 100% revenue growth on a year-on-year basis for 2020 and that obviously is driven by the increased expansion to developed market and also the existing market as well. So that's about the kind of the performance guidance for Bigo for the second half and full year.</p><p>And then in terms of competitive landscape, again, Bigo Live has achieved potential upgrade growth in users and revenues. We think we don't see any other competitors for Bigo Live in all the key markets that operates. And we remain very focused on driving our revenue from the four key markets that Bigo Live operates, as we explained before that includes Southeast Asia market and the Middle East, include North America and Western Europe and will remain very committed for the diversified regional exposure.</p><p>For the Likee business, as you can see, Likee's MAU has reached 150 million in the second quarter, given all the geopolitical risk, we have adopt various strategy in different markets. First, we are cooperating with various local governments and then we are also enhancing our local operations to better suit for the local environment. So, we expect Likee's performance will continue to grow, and meanwhile, we also ramping up Likee's financial capability as well. So, we will enhance in the second quarter -- in the second half of the year, we will enhance Likee's monetization efforts in the key markets as well.</p><p><strong>Thomas Chong</strong> -- <em>Jefferies -- Analyst</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question comes from Yiwen Zhang from Citi. Please go ahead.</p><p><strong>Yiwen Zhang</strong> -- <em>Citigroup -- Analyst</em></p><p>[Foreign Speech]</p><p>Thank you management for taking my question. Congrats on very solid result. So, first question is regarding the overseas strategy, we noticed some markets have some uncertainty. So, how we address our expansion strategy, for example, key markets in terms of user acquisition and the monetization?</p><p>And secondly, is about cash usage, we noticed you have very abundant cash reserve on balance sheet especially [Indecipherable] $810 million in September. So, and we also noticed that you have a regular dividend policy for next three years. So, apart from that, how would you consider cash usage or somewhere you consider ramp up the user acquisition in short video or where you consider to develop new product [Indecipherable]. Thank you.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>Thank you. Let me address those questions. In terms of our expansion strategy for Bigo, as I've laid out, we'll remain very focused for globalization and we want to diversify our original exposure to compensation some of the geopolitical risks. So, we will continue to strengthen our presence in existing markets including Southeast Asia, Middle East, North America, Western Europe and Japan, Korea. We will also further expand to other regions. Thanks to our global operation in over 30 offices around the world. So, that's about the overseas expansion strategy.</p><p>In terms of our cash position, we do have lot of cash onshore and offshore particularly after we sell a portion of Huya shares to Tencent. And that's why we -- in order to maximize shareholder value, we have announced the three-year regular dividend payout as a way to return some of those value to shareholders. In terms of business expansion, we will continue to focus our efforts for live streaming and short-form video user acquisition. In terms of M&As, we don't foresee that we will do big scale M&A thus far. We still want to organically grow our business on a global scale.</p><p><strong>Yiwen Zhang</strong> -- <em>Citigroup -- Analyst</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question comes from Daniel Chen from J.P. Morgan. Please go ahead.</p><p><strong>Daniel Chen</strong> -- <em>J.P. Morgan -- Analyst</em></p><p>Thank you management and congrats on a very strong quarter. My first question is on the Bigo's growth. So, this quarter Bigo live streaming grow by close to 50%. What is the -- what are the major growth countries in such a strong growth? And the second one is on the margin outlook. So, previously we guided kind of a monthly breakeven even by year-end, is there any update on that? And how should we look at Bigo's gross margin trend in the next few quarters? Thank you.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>Thank you, Daniel. Let me address the questions. First one is regarding the driver of the tremendous growth of Bigo. I think, it's continued to be very strong across all the regions we operate that includes Southeast Asia, Middle East and also developed markets. Developed markets as a potential of revenue continues to be very strong. And we expect going forward the revenue contribution from all those markets will be driving the performance for Bigo Live. That's why, as I said, we raised up our guidance for the full year performance of Bigo Live. For the breakeven point that remain to be the same as we communicated before on a single-month basis by end of this year. In the second half the Bigo as -- in total for the segment will be breakeven, thanks to the tremendous revenue growth and operating leverage across many segments.</p><p>For the gross margin, Chen, I think that will be relatively stable for Bigo overseas because the main cost of goods items are revenue sharing which we foresee to be stable. And for the bandwidth and as well as the payment channel costs, we expect to be relatively stable in the next one or two quarters.</p><p><strong>Daniel Chen</strong> -- <em>J.P. Morgan -- Analyst</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Our next question comes from Alex Poon from Morgan Stanley. Please go ahead.</p><p><strong>Alex Poon</strong> -- <em>Morgan Stanley -- Analyst</em></p><p>I'll translate my question. My first question is related to the progress of Likee monetization as you have revised up the Bigo revenue guidance to 100% this year, how much of this is driven by Likee? And Likee has above 5 times the MAU size of Bigo Live, if we take reference of China situation, short video makes much more live streaming revenue than pure live streaming platforms. So, how are you seeing the potential for Likee's monetization scale compared to Bigo Live in the next few years?</p><p>And my second question is related to the post-COVID situation, any user metrics you can share after the lock down is over? Are users still very active? Thank you very much.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>Thank, Alex. Let me address the question. First, regarding the progress of the monetization of Likee, as we explained to investors before, we are foreseeing 10% of Bigo coming from Likee this year. But right now because we raised the revenue forecast for Bigo as a total. So, Likee's contribution, in terms of percentage will be less than 10%. But in general, Likee, I might say, is still on the way, so we foresee Likee's revenue monetization for the second half this year will ramp up.</p><p>And you asked about the potential for Likee's future monetization, we do think, as you mentioned that the short-form video can incorporate lot of the live streaming features and has high potential for monetization. In the mid and long run we do think Likee can create another Bigo Live scale or even bigger than that, but that will take time. So, I think, this year our focus is to first, fuel grow the Likee user base and then convert part of that users to realize the closed group of live streaming.</p><p>One caveat is that due to the recent Indian government banning of the Chinese app, Likee's MAU in India will be impacted in the third quarter. But as I mentioned to investors before, starting from earlier this year we strategically have -- we shift the focus from India to other markets. So, we have purposely reduced the sales, marketing spending in India to better ROI regions including other developed markets and emerging markets. So, even our India users would be impacted. This does not impact the overall strategy and monetization for Likee.</p><p>Second question is regarding the post-COVID-19 situation. We are seeing some countries are returning to kind of normal COVID-19 situation, and luckily, we see that some of the users that are attracted in the COVID-19 season, they remain on Bigo and Likee platform. So, even after COVID-19 has gone a lot of the users have formed the habit of viewing online entertainment including live streaming and short-form video content and remain to be on our platform. And that's why we are confident even after COVID-19 we will be able to drive the user base and monetization in the areas that we are not impacted by the regulations. Thank you.</p><p><strong>Operator</strong></p><p>Our next question comes from Lei Zhang from Bank of America Merrill Lynch. Please go ahead.</p><p><strong>Lei Zhang</strong> -- <em>Bank of America Merrill Lynch -- Analyst</em></p><p>My key question is about the strategy you mentioned, like for YY. And can you give us more color on the expansion in our [Indecipherable] in second half and 2020, especially considering the instability in US and India. Secondly, wondering what's your plan for the remaining shares you have for Huya. Thank you.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>Thank you, Lei. Let me address the questions. So, first, regarding the potential for four times of YY Live sale overseas. We'll remain to be very confident, and the forecast I just mentioned for this year Bigo's revenue growth already taking into account some of the uncertainties resulting from COVID-19 and geopolitical risks.</p><p>In terms of the key markets, I think, we remain to be focused, as I said, in those key markets where we are very strong already including Southeast Asia and Middle East and including those areas that are growing at a much faster rate that includes -- developed markets includes North America, Japan, Korea, Australia, New Zealand and some of the western Europe countries.</p><p>Exactly which countries presents the largest opportunity, I don't think we need to rely on a single market, we track the data on a quarterly basis. The data that is shown across all those regions are all very promising. So, I think, that is the result of our local operations, global brands and close relationship with some of the local regulations. So, we remain to be confident even under the -- some of the geopolitical risks, we will be able to capture those opportunities going forward to create 4 times the YY Live sale.</p><p>In terms of the disposal plan for the remaining shares of Huya. As you all read from the news that Tencent is urging the consolidation of Huya and Douyu. We will -- after the sale of the shares, we still have around 16% of the shares in Huya. So, we will observe the future consolidation plan under Tencent regards Huya and Douyu, and we will benefit from any potential synergies coming out of those transactions. And we will dispose the shares at the right time for the right side and create maximum value for our shareholders.</p><p><strong>Lei Zhang</strong> -- <em>Bank of America Merrill Lynch -- Analyst</em></p><p>Thank you so much.</p><p><strong>Operator</strong></p><p>Our next question comes from Alex Liu from China Renaissance. Please go ahead.</p><p><strong>Alex Liu</strong> -- <em>China Renaissance -- Analyst</em></p><p>[Foreign Speech]</p><p>My first question is on the monetization level of Bigo Live. I think, the total revenue -- yeah, the total revenue of Bigo Live is already larger than our legacy business. I was just wondering whether the management can share some color on the monetization level driver of Bigo Live in the next few years. And second question is on whether -- on the e-commerce business, I was wondering whether the management can share more color on that. Thank you.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>Thank you, Alex. Let me address the first one and Xueling will address the second. First one regarding the drivers for the per user value, we think that overseas live steaming will have high potential or higher single unit user lifetime value than in China. There are several reasons for that. First one, overseas is what we pan live streaming model. The entry barrier for live streaming is much lower. That's why we're seeing participation from the DAUs or Bigo Live is much higher than any other live streaming platform in China. That's the first thing.</p><p>Secondly, the social atmosphere and behavior within the live streaming community overseas is more diverse and prevalent than in China. So, a lot of cases, we've seen that each home, they don't -- they're not eager to cash out the money they earn on the platform. They remain the money they earn within the ecosystem and they tip each other as a way for competition and social interaction. And so that's why typically you see the ARPU, the paying amount per paying user in Bigo Live is much higher in China. And that is quite typical across many countries' region. So, we think that going forward Bigo Live will have higher monetization potential than in China and that's the key reason we think it has at least 4 times of YY Live's scale overseas.</p><p><strong>David Xueling Li</strong> -- <em>Chairman and Chief Executive Officer</em></p><p>[Foreign Speech]</p><p>Yeah. This is David. Let me answer your question in terms of the strategy about e-commerce. So, firstly, if you look at the currency, our gross revenue contribution, a super majority of the revenue is coming from live streaming and then followed by advertising, only a very small portion of our revenue has been generated from e-commerce. But we do expect after several years effort, probably the whole group will become a company which is majorly revenue generated from e-commerce model, then followed by live streaming and advertisement. And for -- in terms of the development of the e-commerce business, we actually had a long-term commitment in terms of further develop of e-commerce.</p><p>We truly believe we have the advantage and competitive edge in the several aspect, right. So, firstly, for the overall JOYY Group, we have over 400 million of the monthly active users outside of China. That massive user base will be a very unique competitive edge compared with other peers.</p><p>Secondly, we truly believe the made in China as well as the advantage coming from our supply chain from the domestic industry will significantly help us to create a very unique model and compare that kind of the very unique competitive edge in China to the outside of China.</p><p>The thirdly, JOYY, we are a company which is driven by the AI technology and AI innovation through of our development in the short-form video arena, and we actually have been accumulated a massive capability in terms of -- which is related to the AI technology, for example, like voice recognition, face recognition, as well as the object recognition et cetera. The impact of the very comprehensive recommendation capability. We truly believe all those kind of AI technologies and expertise actually can be reused into the e-commerce arena, which will also create a very unique competitive edge compared with other e-commerce companies.</p><p>And for those kind of capabilities, which is cannot -- for the single commercial network and other middle and small-sized other company which couldn't achieve, we're happy to help them do that. So, all in all, we understand the e-commerce business and we actually had a very strong patience to continue to develop our e-commerce business in the next three to five years. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. That's all the time we have for questions today. I will hand back to management for their closing remarks.</p><p><strong>Matthew Zhao</strong> -- <em>General Manager of Investor Relations</em></p><p>Okay. Thank you, operator. Thank you, everyone, for joining our call today. We look forward to speaking with everyone next quarter. Thank you.</p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p>Thank you.</p><p><strong>David Xueling Li</strong> -- <em>Chairman and Chief Executive Officer</em></p><p>Thank you</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 61 minutes</strong></p><h2>Call participants:</h2><p><strong>Matthew Zhao</strong> -- <em>General Manager of Investor Relations</em></p><p><strong>David Xueling Li</strong> -- <em>Chairman and Chief Executive Officer</em></p><p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p><p><strong>Thomas Chong</strong> -- <em>Jefferies -- Analyst</em></p><p><strong>Yiwen Zhang</strong> -- <em>Citigroup -- Analyst</em></p><p><strong>Daniel Chen</strong> -- <em>J.P. Morgan -- Analyst</em></p><p><strong>Alex Poon</strong> -- <em>Morgan Stanley -- Analyst</em></p><p><strong>Lei Zhang</strong> -- <em>Bank of America Merrill Lynch -- Analyst</em></p><p><strong>Alex Liu</strong> -- <em>China Renaissance -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/yy">More YY analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than YY</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DYY%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=3217ccf3-c016-4a1d-91ba-2dbada7fcdf5">ten best stocks</a></strong> for investors to buy right now… and YY wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DYY%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=3217ccf3-c016-4a1d-91ba-2dbada7fcdf5" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-89592", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["YY"], "primary_tickers_companies": ["YY"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "JOYY Inc (YY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 72, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-89592"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-89592", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["YY"], "primary_tickers_companies": ["YY"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "JOYY Inc (YY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 72, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], YY earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>JOYY Inc</strong> <span class="ticker" data-id="273778">(<a href="https://www.fool.com/quote/nasdaq/yy/yy/">NASDAQ:YY</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 13, 2020</span>, <em id="time">9:00 p.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the JOYY Inc.'s Second Quarter 2020 Earnings Call. [Operator Instructions] After the management's prepared remarks, there will be a question-and-answer session. [Operator Instructions].</p>, <p>I'd now like to hand the conference over to your host today, Mr. Matthew Zhao, the company's General Manager of Investor Relations. Please go ahead, Matthew.</p>, <p><strong>Matthew Zhao</strong> -- <em>General Manager of Investor Relations</em></p>, <p>Thank you, operator. Good morning and good evening, everyone. Welcome to JOYY's second quarter 2020 earnings conference call. Joining us today are Mr. David Xueling Li, Chairman and CEO of JOYY; CFO, Mr. Bing Jin; and COO, Ms. Ting Li.</p>, <p>For today's call, management will first provide a review of the quarter, and then we will conduct a Q&A session. The second quarter 2020 financial results and webcast of this conference call are available at ir.yy.com. A replay of this call will also be available on our website in a few hours.</p>, <p>Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which apply to this call as we will make forward-looking statements. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.</p>, <p>I will now turn the call over to our Chairman and CEO, Mr. David Xueling Li. Please go ahead, sir.</p>, <p><strong>David Xueling Li</strong> -- <em>Chairman and Chief Executive Officer</em></p>, <p>Thank you, Mathew.</p>, <p>[Foreign Speech]</p>, <p>Hello, everyone. Welcome to our second quarter 2020 Earnings Call.</p>, <p>[Foreign Speech]</p>, <p>Before we jump into details about the business development in order to provide everyone with a better picture of our quarterly performance, I would like to remind you that starting from this quarter we have deconsolidated Huya's financial results and listed them as discontinued operations. Such deconsolidation applies to both current quarter and historical comparative period.</p>, <p>[Foreign Speech]</p>, <p>In light of the rapidly changing market dynamics due to the COVID-19 and recent geopolitical uncertainties, we have been actively reviewing our global dual-engine growth strategy. Our conclusions are three-fold. First, we remain committed to global expansion. Although our business in certain countries experienced some setbacks due to local regulatory changes, we believe such setbacks are temporary as we are convinced that the movement toward worldwide activity is irresistible. Not only does globalization lead to streamlining of information exchange, emergence of innovative technologies and replication of successful business models across geographic boundaries, it also unleashed the power of Internet to boost productivity and raise living standards.</p>, <p>We are at the forefront of this globalization wave and we intend to ride it out deftly and profitably. For example, through Bigo Live, our global live streaming platform, we plan to expand to more regions and further reduce reliance on any single market. As Bigo Live's user base expands, we will remain focused on developing a highly integrated ecosystem for social and entertainment live streaming. We believe Bigo Live has the potential to generate four times as much revenue as YY Live over the next few years.</p>, <p>[Foreign Speech]</p>, <p>Secondly, we continue to advance our local operations in response to growing geopolitical tensions and to ensure our full compliance with changing regulations in terms of content, product and operation. We proactively engage in frequent dialog with various local authorities in every one of the geographic regions we operate. Because Bigo Live is headquartered in Singapore, we have been under the Singaporean jurisdiction since inception. We have also maintained its operation independently out of China, even after our completion of its acquisition in 2019.</p>, <p>Going forward, we plan to hire more local employees and boost their contribution to Bigo. As we leverage our network of over 30 localized operations around the world, the breadth and depth of our global operation increases and our operational and financial performance enchances accordingly.</p>, <p>[Foreign Speech]</p>, <p>Thirdly, we firmly anchored our competitive advantage in video content and video services. We believe that video has become the mainstream medium for disseminating information over the Internet. We are also convinced that for the coming generations of Internet users, video will become the dominant format for social networking, content production and content resumption. Therefore, we plan to diversify our monetization capability to advancement in live streaming, short-form video and video-based information sharing.</p>, <p>Furthermore, we plan to enhance our monetization capability in areas including advertisement and e-commerce. As a precursor to our expenditure into e-commerce, we made a strategic investment in Tongcheng Life this quarter. We believe that we will be able to generate recurring revenue from live streaming, advertising and e-commerce as our global user base grows.</p>, <p>[Foreign Speech]</p>, <p>Executing the three aforementioned growth strategies, we achieved solid operational performance during the second quarter of 2020. As a result of our extensive global presence and localized operations, we are well positioned to help people around the world to combat COVID-19. In May, we launched a 24-hour non-stop global charity concert online harnessing the strength of global -- Bigo's global community, the concert featured more than 100 live streaming hosts in over 20 countries, attracted close to 4 million viewers around the world, and raised more than $100,000 of donation to the World Health Organization's COVID-19 Solidarity Response Fund.</p>, <p>An event on such a worldwide scale is made possible only through a truly global social platform like Bigo. It also be extended by Bigo's unique combination of globalization and localization capabilities. Besides the online charity concert, we also joined hands with live streaming hosts around the world to launch a series of online activities to bring comfort and joy to our users in need. For example, to help local communities stay fit and healthy at home, we launched the STAYATBIGO campaign that features informational seminars by healthcare professionals, entertainment performance by local music DJ and workout sessions by fitness enthusiasts.</p>, <p>[Foreign Speech]</p>, <p>Our ability to serve the various local communities around the world not only enhances our brand recognition in local markets but also boosts our operating and financial results. Despite the uncertain and challenging macro environment during the second quarter, we grew our net revenues by 36.3% year-over-year to RMB5.84 billion, in particular, Bigo's live streaming revenues grew by 158.8% year-over-year to RMB2.95 billion, contributing more than half of the group's total live streaming revenues for the first time ever. Bigo Live's mobile MAUs increased by 41.3% year-over-year and 10% quarter-over-quarter to 29.4 million with paying user base also grew as a result of our efforts in cultivating users' paying habits on the platform.</p>, <p>[Foreign Speech]</p>, <p>In addition, Bigo Live's healthy growth is also attributable to our diligent efforts in nurturing users' habitual use of live steaming as a medium for both entertainment and socialization. During the quarter, for example, we optimized our social interaction features called BAR to continuously intensify Bigo Live's highly engaging and interactive nature. BAR enables users to -- and hosts to share updates with one another in a increasingly frictionless manner. As a result, over 50% of Bigo Live's users accessed BAR during the second quarter. In addition, through live streaming showrooms or BAR's synchronized friend circle, each Bigo Live user follow 11 hosts on average, representing a significant increase over the previous quarter.</p>, <p>[Foreign Speech]</p>, <p>On the short-form video front, we focused our efforts on cultivating Likee's global ecosystem, diversifying its content offerings, refining its product features and synchronizing expansion with local market characteristics. As a result, Likee's total MAUs surged by 86.2% year-over-year and 14.2% quarter-over-quarter to 150.3 million in the period. We also continued Likee's geographical expansion by deepening its foothold in key markets such as Russia and Indonesia. Notably, Likee's total MAU in Russia almost doubled year-over-year in the period.</p>, <p>[Foreign Speech]</p>, <p>As Likee's brand influence becomes increasingly pervasive and as its user base expands continuously, we are actively exploring various innovative marketing initiatives to help it penetrate into younger generation. In May, for example, Likee cooperated with a series of fashion and cosmetics brands in Russia to launch a thematic short-form video challenge for beauty festivals. Leveraging our state-of-the-art technology, we developed special impact templates and customized interactive gameplay features for the campaign to boost its user participation and enthusiasm. As a result, the event struck a societal nerve, enticed a large number of female Russian users to voluntarily create and share short-form videos and generated more than 200 million cumulative views on the platform, thus making a perfect stage for bolstering our partner's brand exposure in the local market.</p>, <p>[Foreign Speech]</p>, <p>Now, let me share some updates on HAGO. By focusing on local monetization initiatives with favorable ROI, we delivered significant revenue growth in the period. HAGO's MAUs also remained relatively stable at 31.7 million. As we continue to explore different methods of bolstering HAGO's long-term user value, we were able to further enhance its social nature, strengthen its user connection and develop additional context for user interactions. Meanwhile, to cater to the younger generation preferences, we have expanded its content offering with comedy, dance and music performances.</p>, <p>In addition, we continue to update HAGO's product features with cutting-edge technology. For example, by integrating data analysis with AI-algorithm, we optimized HAGO's content recommendation system, so that it can match content with individual user's interest more precisely. Moreover, our user data analytics has led us to upgrade a number of features in HAGO such as party chat room and user groups in order to enhance user experience, stimulate social interaction, improve user community and group penetration, enhance HAGO's social nature and increase its user stickiness.</p>, <p>[Foreign Speech]</p>, <p>Last but not the least, on the domestic front, we fortify our leadership in China's live streaming entertainment industry and expanded our live streaming offerings during the quarter. After our live streaming celebrity variety show, Idol Friday, became a smach hit upon launch has continued to attract additional viewers in the second quarter. Building upon our success with Idol Friday and other variety shows, we launched a new program called Let's Sing. Similar to Idol Friday, Let's Sing has created a virtual stage for professional musicians to broadcast their performances online, while engaging in real time online chats with their fans. It is well suited to facilitate social interactions among users, hosts and guests. As it's combination of music talent, celebrity charm and live interaction proved especially attractive to audiences, we plan to replicate its formula for success to other future endeavors.</p>, <p>[Foreign Speech]</p>, <p>To ensure a steady flow of premium live streaming content on YY Live, we further expanded the variety of our content offerings during the second quarter. For example, we introduced customized support initiatives to help high quality celebrity launch their own personalized live streaming channels. The effectiveness of such incentives has led to the formation of several partnership with professional chess players on YY Live. Top chess players from prestigious institutes, such as the National Chess Academy can now invite YY Live users to participate in online games, while providing play by play professional narratives through live streaming. As user intrigued with this special type of live streaming content growth, so that the popularity of our chess-related live streaming at a rapid pace.</p>, <p>[Foreign Speech]</p>, <p>In addition, as we advanced each of our businesses and full value, we are always looking for ways to increase returns to our shareholders. This quarter, our Board of Directors approved a quarterly dividend policy for the next three years. Under this policy, quarterly dividend will be set at approximately $25 million in each fiscal quarter. As always, we appreciate and value the long-term support from our shareholders and we are always devoted to maximizing the interest for our shareholders.</p>, <p>[Foreign Speech]</p>, <p>In summary, we firmly upheld our dual-engine growth strategy during the quarter. We upgraded our platforms, localized operation and brought joyful experiences to people around the world. Despite the macroeconomic uncertainties caused by COVID-19, we remain confident in our business model's underlying strength and favorable outlook. Our long-term business plan remains intact. We continue to work tirelessly to build our global live streaming and short-form video ecosystem. We remain fully committed to serving our users, delivering shareholder value and constructing a truly global video-based social media platform for all.</p>, <p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p>, <p>That concludes David's prepared remarks. Now, as JOYY's CFO, I will talk about the financial results. Please be noted that the financial information and non-GAAP financial information disclosed in our second quarter earnings press release is presented on a continuing operations basis unless otherwise specifically stated. After the deconsolidation of Huya, the company accounts for our investment in Huya as an equity method investment and apply the equity method accounting one quarter in arrears to enable us to provide financial disclosures independent of the reporting schedule of Huya.</p>, <p>During the second quarter of 2020, we maintain our strong momentum and delivered robust financial and operational performances. Our total net revenues for the second quarter increased by 36.3% year-over-year to RMB5.84 billion, exceeding both the high end of our previous guidance range and Street consensus. In particular, our live streaming revenues for the second quarter increased by 40.1% year-over-year to RMB5.61 billion, driven by live steaming revenues growth on Bigo segment.</p>, <p>Other revenues in the second quarter decreased by 18% to RMB232.3 million, primarily due to the decrease in other revenues in YY segment. Cost of revenues for the second quarter increased by 50.8% year-over-year to RMB3.77 billion. Revenue sharing fees and content costs increased to RMB2.6 billion in the second quarter from RMB1.79 billion in the same period of 2019, which was in line with the increase in live streaming revenues.</p>, <p>Bandwidth costs increased to RMB280.7 million from RMB228.1 million in the same period of 2019 as the overseas user base and time spent continued to expand following the consolidation of Bigo. Gross profit for the second quarter increased by 16% year-over-year to RMB2.07 billion. Gross margin in the second quarter of 2020 decreased to 35.5% from 41.7% in the same period of 2019.</p>, <p>The gross margin contraction was primarily caused by the fact that Bigo segment had lower gross margin but contributed significantly greater portion of net revenues in the second quarter of 2020, compared with the same period last year. Operating expenses for the second quarter increased to RMB2.02 billion from RMB1.79 billion in the same period of 2019. Sales and marketing expenses decreased to RMB909.8 million in the period from RMB979.9 million in the same period of 2019, primarily due to the company's less spending in sales, marketing initiatives in overseas markets due to the COVID-19.</p>, <p>Our R&D expenses for the second quarter increased to RMB693.5 million from RMB550 million in the same period of 2019, mostly due to the increase in headcount and investments in talent recruitment as part of the company's efforts to enhance its research and development capabilities. Our GAAP operating income for the second quarter was RMB95.2 million, compared to RMB4.3 million in the same period of 2019. Operating margin for the second quarter increased to 1.6% from 0.1% in the prior year period, primarily due to narrowing operation loss of Bigo segment.</p>, <p>Our non-GAAP operating income for the second quarter, which excludes share-based compensation expenses, amortization of intangible assets from business acquisitions, as well as impairment of goodwill and investments, and gain on disposal of subsidiaries and business, increased by 24.6% to RMB509.3 million from RMB408.7 million in the same period of 2019. Our non-GAAP operating margin for the second quarter was 8.7% compared to 9.5% in the same period of 2019.</p>, <p>GAAP net income from continuing operations attributable to controlling interest of JOYY Inc. for the second quarter of 2020 was RMB619.4 million compared to net loss of RMB6.1 million in the same period of 2019. Net margin was 10.6% in the second quarter of 2020, compared to negative 0.1% in the corresponding period of 2019, mainly due to the income from fair value change in investment.</p>, <p>Non-GAAP net income from continuing operations attributable to controlling interest of JOYY Inc. increased by 38.3% to RMB493.6 million from RMB357 million in the same period of 2019. Non-GAAP net margin increased to 8.5% in the second quarter of 2020 from 8.3% in the same period of 2019.</p>, <p>Diluted net income from continuing operations per ADS in the second quarter of 2020 was RMB7.39 compared to diluted net loss from continuing operations per ADS RMB0.28 in the same period of 2019. Non-GAAP diluted net income from continuing operations per ADS increased by 27.2% to RMB5.57 from RMB4.38 in the same period of 2019.</p>, <p>In addition, as David mentioned in his prepared remarks, we are pleased to report that our Board of Directors has approved a quarterly dividend policy for the next three years. Under the policy, quarterly dividends will be set at approximately $25 million in each fiscal quarter. Accordingly, we will be distributing a dividend of $0.31 per ADS in the second quarter of 2020.</p>, <p>Looking forward to the third quarter of 2020, we expect our net revenues to be between RMB5.85 billion and RMB6 billion, excluding the revenue contribution from Huya in the same period of last year, representing a year-over-year increase between 26.7% to 29.9%. We currently have limited visibility surrounding COVID-19 epidemic's long-term impacts and geopolitical uncertainties on our business and the market in which we operate. Therefore, this forecast only reflects our current and preliminary views on the market and operational conditions which are subject to change. That concludes our prepared remarks.</p>, <p>Operator, we would now like to open up the call to questions.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-98079">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-98079');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Thomas Chong from Jefferies. Please go ahead.</p>, <p><strong>Thomas Chong</strong> -- <em>Jefferies -- Analyst</em></p>, <p>[Foreign Speech]</p>, <p>Thanks management for taking my questions. I have -- and congratulations on the strong results for Bigo. I have two questions. My first question is about the second half outlook for Bigo, in particular, how we should think about the business trend in developed and emerging market in the second half? And my second question is about the competitive landscape. How should we bring above our competitive position for Likee and Bigo Live in coming years? Thank you.</p>, <p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you, Thomas. This is Bing. Let me address the question. So, regarding the second half performance forecast of Bigo, we think Bigo is well balanced across different regions and we -- if you look at the second quarter performance, it's 148% year growth which is very tremendous. We expect that growth momentum to continue. So, we will raise up our full year guidance for Bigo's total revenue, which previously we communicated to the market is around 65%, 70% year-on-year growth.</p>, <p>Right now, judging from the recent performance and taking into account of the labor situation across the world, we think Bigo can generate somewhere close to 100% revenue growth on a year-on-year basis for 2020 and that obviously is driven by the increased expansion to developed market and also the existing market as well. So that's about the kind of the performance guidance for Bigo for the second half and full year.</p>, <p>And then in terms of competitive landscape, again, Bigo Live has achieved potential upgrade growth in users and revenues. We think we don't see any other competitors for Bigo Live in all the key markets that operates. And we remain very focused on driving our revenue from the four key markets that Bigo Live operates, as we explained before that includes Southeast Asia market and the Middle East, include North America and Western Europe and will remain very committed for the diversified regional exposure.</p>, <p>For the Likee business, as you can see, Likee's MAU has reached 150 million in the second quarter, given all the geopolitical risk, we have adopt various strategy in different markets. First, we are cooperating with various local governments and then we are also enhancing our local operations to better suit for the local environment. So, we expect Likee's performance will continue to grow, and meanwhile, we also ramping up Likee's financial capability as well. So, we will enhance in the second quarter -- in the second half of the year, we will enhance Likee's monetization efforts in the key markets as well.</p>, <p><strong>Thomas Chong</strong> -- <em>Jefferies -- Analyst</em></p>, <p>Thank you.</p>, <p><strong>Operator</strong></p>, <p>Our next question comes from Yiwen Zhang from Citi. Please go ahead.</p>, <p><strong>Yiwen Zhang</strong> -- <em>Citigroup -- Analyst</em></p>, <p>[Foreign Speech]</p>, <p>Thank you management for taking my question. Congrats on very solid result. So, first question is regarding the overseas strategy, we noticed some markets have some uncertainty. So, how we address our expansion strategy, for example, key markets in terms of user acquisition and the monetization?</p>, <p>And secondly, is about cash usage, we noticed you have very abundant cash reserve on balance sheet especially [Indecipherable] $810 million in September. So, and we also noticed that you have a regular dividend policy for next three years. So, apart from that, how would you consider cash usage or somewhere you consider ramp up the user acquisition in short video or where you consider to develop new product [Indecipherable]. Thank you.</p>, <p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you. Let me address those questions. In terms of our expansion strategy for Bigo, as I've laid out, we'll remain very focused for globalization and we want to diversify our original exposure to compensation some of the geopolitical risks. So, we will continue to strengthen our presence in existing markets including Southeast Asia, Middle East, North America, Western Europe and Japan, Korea. We will also further expand to other regions. Thanks to our global operation in over 30 offices around the world. So, that's about the overseas expansion strategy.</p>, <p>In terms of our cash position, we do have lot of cash onshore and offshore particularly after we sell a portion of Huya shares to Tencent. And that's why we -- in order to maximize shareholder value, we have announced the three-year regular dividend payout as a way to return some of those value to shareholders. In terms of business expansion, we will continue to focus our efforts for live streaming and short-form video user acquisition. In terms of M&As, we don't foresee that we will do big scale M&A thus far. We still want to organically grow our business on a global scale.</p>, <p><strong>Yiwen Zhang</strong> -- <em>Citigroup -- Analyst</em></p>, <p>Thank you.</p>, <p><strong>Operator</strong></p>, <p>Our next question comes from Daniel Chen from J.P. Morgan. Please go ahead.</p>, <p><strong>Daniel Chen</strong> -- <em>J.P. Morgan -- Analyst</em></p>, <p>Thank you management and congrats on a very strong quarter. My first question is on the Bigo's growth. So, this quarter Bigo live streaming grow by close to 50%. What is the -- what are the major growth countries in such a strong growth? And the second one is on the margin outlook. So, previously we guided kind of a monthly breakeven even by year-end, is there any update on that? And how should we look at Bigo's gross margin trend in the next few quarters? Thank you.</p>, <p><strong>Bing Jin</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you, Daniel. Let me address the questions. First one is regarding the driver of the tremendous growth of Bigo. I think, it's continued to be very strong across all the regions we operate that includes Southeast Asia, Middle East and also developed markets. Developed markets as a potential of revenue continues to be very strong. And we expect going forward the revenue contribution from all those markets will be driving the performance for Bigo Live. That's why, as I said, we raised up our guidance for the full year performance of Bigo Live. For the breakeven point that remain to be the same as we communicated before on a single-month basis by end of this year. In the second half the Bigo as -- in total for the segment will be breakeven, thanks to the tremendous revenue growth and operating leverage across many segments.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-89592", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["YY"], "primary_tickers_companies": ["YY"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "JOYY Inc (YY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 72, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-89592"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-89592", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["YY"], "primary_tickers_companies": ["YY"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "JOYY Inc (YY) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 72, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | YY earnings call for the period ending June 30, 2020. | Ladies and gentlemen, thank you for standing by, and welcome to the JOYY Inc.'s Second Quarter 2020 Earnings Call. [Operator Instructions] After the management's prepared remarks, there will be a question-and-answer session. [Operator Instructions].\n I'd now like to hand the conference over to your host today, Mr. Matthew Zhao, the company's General Manager of Investor Relations. Please go ahead, Matthew.\n Thank you, operator. Good morning and good evening, everyone. Welcome to JOYY's second quarter 2020 earnings conference call. Joining us today are Mr. David Xueling Li, Chairman and CEO of JOYY; CFO, Mr. Bing Jin; and COO, Ms. Ting Li.\n For today's call, management will first provide a review of the quarter, and then we will conduct a Q&A session. The second quarter 2020 financial results and webcast of this conference call are available at ir.yy.com. A replay of this call will also be available on our website in a few hours.\n Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which apply to this call as we will make forward-looking statements. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.\n I will now turn the call over to our Chairman and CEO, Mr. David Xueling Li. Please go ahead, sir.\n Thank you, Mathew.\n Hello, everyone. Welcome to our second quarter 2020 Earnings Call.\n Before we jump into details about the business development in order to provide everyone with a better picture of our quarterly performance, I would like to remind you that starting from this quarter we have deconsolidated Huya's financial results and listed them as discontinued operations. Such deconsolidation applies to both current quarter and historical comparative period.\n In light of the rapidly changing market dynamics due to the COVID-19 and recent geopolitical uncertainties, we have been actively reviewing our global dual-engine growth strategy. Our conclusions are three-fold. First, we remain committed to global expansion. Although our business in certain countries experienced some setbacks due to local regulatory changes, we believe such setbacks are temporary as we are convinced that the movement toward worldwide activity is irresistible. Not only does globalization lead to streamlining of information exchange, emergence of innovative technologies and replication of successful business models across geographic boundaries, it also unleashed the power of Internet to boost productivity and raise living standards.\n We are at the forefront of this globalization wave and we intend to ride it out deftly and profitably. For example, through Bigo Live, our global live streaming platform, we plan to expand to more regions and further reduce reliance on any single market. As Bigo Live's user base expands, we will remain focused on developing a highly integrated ecosystem for social and entertainment live streaming. We believe Bigo Live has the potential to generate four times as much revenue as YY Live over the next few years.\n Secondly, we continue to advance our local operations in response to growing geopolitical tensions and to ensure our full compliance with changing regulations in terms of content, product and operation. We proactively engage in frequent dialog with various local authorities in every one of the geographic regions we operate. Because Bigo Live is headquartered in Singapore, we have been under the Singaporean jurisdiction since inception. We have also maintained its operation independently out of China, even after our completion of its acquisition in 2019.\n Going forward, we plan to hire more local employees and boost their contribution to Bigo. As we leverage our network of over 30 localized operations around the world, the breadth and depth of our global operation increases and our operational and financial performance enchances accordingly.\n Thirdly, we firmly anchored our competitive advantage in video content and video services. We believe that video has become the mainstream medium for disseminating information over the Internet. We are also convinced that for the coming generations of Internet users, video will become the dominant format for social networking, content production and content resumption. Therefore, we plan to diversify our monetization capability to advancement in live streaming, short-form video and video-based information sharing.\n Furthermore, we plan to enhance our monetization capability in areas including advertisement and e-commerce. As a precursor to our expenditure into e-commerce, we made a strategic investment in Tongcheng Life this quarter. We believe that we will be able to generate recurring revenue from live streaming, advertising and e-commerce as our global user base grows.\n Executing the three aforementioned growth strategies, we achieved solid operational performance during the second quarter of 2020. As a result of our extensive global presence and localized operations, we are well positioned to help people around the world to combat COVID-19. In May, we launched a 24-hour non-stop global charity concert online harnessing the strength of global -- Bigo's global community, the concert featured more than 100 live streaming hosts in over 20 countries, attracted close to 4 million viewers around the world, and raised more than $100,000 of donation to the World Health Organization's COVID-19 Solidarity Response Fund.\n An event on such a worldwide scale is made possible only through a truly global social platform like Bigo. It also be extended by Bigo's unique combination of globalization and localization capabilities. Besides the online charity concert, we also joined hands with live streaming hosts around the world to launch a series of online activities to bring comfort and joy to our users in need. For example, to help local communities stay fit and healthy at home, we launched the STAYATBIGO campaign that features informational seminars by healthcare professionals, entertainment performance by local music DJ and workout sessions by fitness enthusiasts.\n Our ability to serve the various local communities around the world not only enhances our brand recognition in local markets but also boosts our operating and financial results. Despite the uncertain and challenging macro environment during the second quarter, we grew our net revenues by 36.3% year-over-year to RMB5.84 billion, in particular, Bigo's live streaming revenues grew by 158.8% year-over-year to RMB2.95 billion, contributing more than half of the group's total live streaming revenues for the first time ever. Bigo Live's mobile MAUs increased by 41.3% year-over-year and 10% quarter-over-quarter to 29.4 million with paying user base also grew as a result of our efforts in cultivating users' paying habits on the platform.\n In addition, Bigo Live's healthy growth is also attributable to our diligent efforts in nurturing users' habitual use of live steaming as a medium for both entertainment and socialization. During the quarter, for example, we optimized our social interaction features called BAR to continuously intensify Bigo Live's highly engaging and interactive nature. BAR enables users to -- and hosts to share updates with one another in a increasingly frictionless manner. As a result, over 50% of Bigo Live's users accessed BAR during the second quarter. In addition, through live streaming showrooms or BAR's synchronized friend circle, each Bigo Live user follow 11 hosts on average, representing a significant increase over the previous quarter.\n On the short-form video front, we focused our efforts on cultivating Likee's global ecosystem, diversifying its content offerings, refining its product features and synchronizing expansion with local market characteristics. As a result, Likee's total MAUs surged by 86.2% year-over-year and 14.2% quarter-over-quarter to 150.3 million in the period. We also continued Likee's geographical expansion by deepening its foothold in key markets such as Russia and Indonesia. Notably, Likee's total MAU in Russia almost doubled year-over-year in the period.\n As Likee's brand influence becomes increasingly pervasive and as its user base expands continuously, we are actively exploring various innovative marketing initiatives to help it penetrate into younger generation. In May, for example, Likee cooperated with a series of fashion and cosmetics brands in Russia to launch a thematic short-form video challenge for beauty festivals. Leveraging our state-of-the-art technology, we developed special impact templates and customized interactive gameplay features for the campaign to boost its user participation and enthusiasm. As a result, the event struck a societal nerve, enticed a large number of female Russian users to voluntarily create and share short-form videos and generated more than 200 million cumulative views on the platform, thus making a perfect stage for bolstering our partner's brand exposure in the local market.\n Now, let me share some updates on HAGO. By focusing on local monetization initiatives with favorable ROI, we delivered significant revenue growth in the period. HAGO's MAUs also remained relatively stable at 31.7 million. As we continue to explore different methods of bolstering HAGO's long-term user value, we were able to further enhance its social nature, strengthen its user connection and develop additional context for user interactions. Meanwhile, to cater to the younger generation preferences, we have expanded its content offering with comedy, dance and music performances.\n In addition, we continue to update HAGO's product features with cutting-edge technology. For example, by integrating data analysis with AI-algorithm, we optimized HAGO's content recommendation system, so that it can match content with individual user's interest more precisely. Moreover, our user data analytics has led us to upgrade a number of features in HAGO such as party chat room and user groups in order to enhance user experience, stimulate social interaction, improve user community and group penetration, enhance HAGO's social nature and increase its user stickiness.\n Last but not the least, on the domestic front, we fortify our leadership in China's live streaming entertainment industry and expanded our live streaming offerings during the quarter. After our live streaming celebrity variety show, Idol Friday, became a smach hit upon launch has continued to attract additional viewers in the second quarter. Building upon our success with Idol Friday and other variety shows, we launched a new program called Let's Sing. Similar to Idol Friday, Let's Sing has created a virtual stage for professional musicians to broadcast their performances online, while engaging in real time online chats with their fans. It is well suited to facilitate social interactions among users, hosts and guests. As it's combination of music talent, celebrity charm and live interaction proved especially attractive to audiences, we plan to replicate its formula for success to other future endeavors.\n To ensure a steady flow of premium live streaming content on YY Live, we further expanded the variety of our content offerings during the second quarter. For example, we introduced customized support initiatives to help high quality celebrity launch their own personalized live streaming channels. The effectiveness of such incentives has led to the formation of several partnership with professional chess players on YY Live. Top chess players from prestigious institutes, such as the National Chess Academy can now invite YY Live users to participate in online games, while providing play by play professional narratives through live streaming. As user intrigued with this special type of live streaming content growth, so that the popularity of our chess-related live streaming at a rapid pace.\n In addition, as we advanced each of our businesses and full value, we are always looking for ways to increase returns to our shareholders. This quarter, our Board of Directors approved a quarterly dividend policy for the next three years. Under this policy, quarterly dividend will be set at approximately $25 million in each fiscal quarter. As always, we appreciate and value the long-term support from our shareholders and we are always devoted to maximizing the interest for our shareholders.\n In summary, we firmly upheld our dual-engine growth strategy during the quarter. We upgraded our platforms, localized operation and brought joyful experiences to people around the world. Despite the macroeconomic uncertainties caused by COVID-19, we remain confident in our business model's underlying strength and favorable outlook. Our long-term business plan remains intact. We continue to work tirelessly to build our global live streaming and short-form video ecosystem. We remain fully committed to serving our users, delivering shareholder value and constructing a truly global video-based social media platform for all.\n That concludes David's prepared remarks. Now, as JOYY's CFO, I will talk about the financial results. Please be noted that the financial information and non-GAAP financial information disclosed in our second quarter earnings press release is presented on a continuing operations basis unless otherwise specifically stated. After the deconsolidation of Huya, the company accounts for our investment in Huya as an equity method investment and apply the equity method accounting one quarter in arrears to enable us to provide financial disclosures independent of the reporting schedule of Huya.\n During the second quarter of 2020, we maintain our strong momentum and delivered robust financial and operational performances. Our total net revenues for the second quarter increased by 36.3% year-over-year to RMB5.84 billion, exceeding both the high end of our previous guidance range and Street consensus. In particular, our live streaming revenues for the second quarter increased by 40.1% year-over-year to RMB5.61 billion, driven by live steaming revenues growth on Bigo segment.\n Other revenues in the second quarter decreased by 18% to RMB232.3 million, primarily due to the decrease in other revenues in YY segment. Cost of revenues for the second quarter increased by 50.8% year-over-year to RMB3.77 billion. Revenue sharing fees and content costs increased to RMB2.6 billion in the second quarter from RMB1.79 billion in the same period of 2019, which was in line with the increase in live streaming revenues.\n Bandwidth costs increased to RMB280.7 million from RMB228.1 million in the same period of 2019 as the overseas user base and time spent continued to expand following the consolidation of Bigo. Gross profit for the second quarter increased by 16% year-over-year to RMB2.07 billion. Gross margin in the second quarter of 2020 decreased to 35.5% from 41.7% in the same period of 2019.\n The gross margin contraction was primarily caused by the fact that Bigo segment had lower gross margin but contributed significantly greater portion of net revenues in the second quarter of 2020, compared with the same period last year. Operating expenses for the second quarter increased to RMB2.02 billion from RMB1.79 billion in the same period of 2019. Sales and marketing expenses decreased to RMB909.8 million in the period from RMB979.9 million in the same period of 2019, primarily due to the company's less spending in sales, marketing initiatives in overseas markets due to the COVID-19.\n Our R&D expenses for the second quarter increased to RMB693.5 million from RMB550 million in the same period of 2019, mostly due to the increase in headcount and investments in talent recruitment as part of the company's efforts to enhance its research and development capabilities. Our GAAP operating income for the second quarter was RMB95.2 million, compared to RMB4.3 million in the same period of 2019. Operating margin for the second quarter increased to 1.6% from 0.1% in the prior year period, primarily due to narrowing operation loss of Bigo segment.\n Our non-GAAP operating income for the second quarter, which excludes share-based compensation expenses, amortization of intangible assets from business acquisitions, as well as impairment of goodwill and investments, and gain on disposal of subsidiaries and business, increased by 24.6% to RMB509.3 million from RMB408.7 million in the same period of 2019. Our non-GAAP operating margin for the second quarter was 8.7% compared to 9.5% in the same period of 2019.\n GAAP net income from continuing operations attributable to controlling interest of JOYY Inc. for the second quarter of 2020 was RMB619.4 million compared to net loss of RMB6.1 million in the same period of 2019. Net margin was 10.6% in the second quarter of 2020, compared to negative 0.1% in the corresponding period of 2019, mainly due to the income from fair value change in investment.\n Non-GAAP net income from continuing operations attributable to controlling interest of JOYY Inc. increased by 38.3% to RMB493.6 million from RMB357 million in the same period of 2019. Non-GAAP net margin increased to 8.5% in the second quarter of 2020 from 8.3% in the same period of 2019.\n Diluted net income from continuing operations per ADS in the second quarter of 2020 was RMB7.39 compared to diluted net loss from continuing operations per ADS RMB0.28 in the same period of 2019. Non-GAAP diluted net income from continuing operations per ADS increased by 27.2% to RMB5.57 from RMB4.38 in the same period of 2019.\n In addition, as David mentioned in his prepared remarks, we are pleased to report that our Board of Directors has approved a quarterly dividend policy for the next three years. Under the policy, quarterly dividends will be set at approximately $25 million in each fiscal quarter. Accordingly, we will be distributing a dividend of $0.31 per ADS in the second quarter of 2020.\n Looking forward to the third quarter of 2020, we expect our net revenues to be between RMB5.85 billion and RMB6 billion, excluding the revenue contribution from Huya in the same period of last year, representing a year-over-year increase between 26.7% to 29.9%. We currently have limited visibility surrounding COVID-19 epidemic's long-term impacts and geopolitical uncertainties on our business and the market in which we operate. Therefore, this forecast only reflects our current and preliminary views on the market and operational conditions which are subject to change. That concludes our prepared remarks.\n Operator, we would now like to open up the call to questions.\n | JOYY Inc | (NASDAQ:YY) | Aug 13, 2020 | 9:00 p.m. ET | 9 | pm | 2020-08-13 | 2020-08-14 | 2020-08-13 | 2020-08-17 | NASDAQ | First, we remain committed to global expansion. | First, we remain committed to global expansion. | [0.5554454 0.00684219 0.4377125 ] | positive | 0.548603 | 2020-08-17 | 82.349998 | 82.809998 | 79.280098 | 80.580002 | 1077373.0 | 80.809998 | 82.449997 | 78.805199 | 81.620003 | 1159572.0 | Media | 2020-06-30 | 2020-06-30 | 5.57 | 4.923225 | 2020-06-30 | YY | 0.646775 | beat | -0.729996 | decrease | 0 | positive |
| 596 | ZGNX | /earnings/call-transcripts/2020/08/06/zogenix-inc-zgnx-q2-2020-earnings-call-transcript.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Zogenix Inc</strong> <span class="ticker" data-id="224981">(<a href="https://www.fool.com/quote/nasdaq/zogenix-inc/zgnx/">NASDAQ:ZGNX</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 5, 2020</span>, <em id="time">4:30 p.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Good day, and welcome to the Zogenix Second Quarter 2020 Earnings Call. Today's conference is being recorded.</p><p>At this time, I would like to turn the conference over to Brian Ritchie, LifeSci Advisors. Please go ahead.</p><p><strong>Brian Ritchie</strong> -- <em>Managing Director</em></p><p>Thank you, operator. And thank you all for joining us this afternoon. With me on today's call are Chief Executive Officer, Dr. Stephen Farr; Chief Commercial Officer, Ashish Sagrolikar; and Chief Financial Officer, Michael Smith; as well as Dr. Joanne Quan, Chief Medical Officer of Modis Therapeutics, a Zogenix company.</p><p>This afternoon, Zogenix issued a news release providing a business update, announcing financial results for the second quarter ended June 30th, 2020. Please note that certain information discussed on the call today is covered under the safe harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in Zogenix' press release issued today and the company's SEC filings, including in the Annual Report on Form 10-K and subsequent filings.</p><p>This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, August 5th, 2020. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.</p><p>Now, I'd like to turn the call over to Steve. Go ahead, Steve.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you, Brian, and good afternoon to everyone. We ended the previous quarter with the great news that FINTEPLA had received FDA approval for the treatment of seizures associated with Dravet Syndrome. This is our first drug approval since we pivoted our strategy to focus on developing and commercializing transformative therapies for rare diseases, and as a result of the tremendous work and dedication of all my colleagues at Zogenix. Once again, I would like to thank the patients, families and investigators, who participated in our clinical program for all they have done to help us achieve this tremendous milestone. This approval has enabled us to enter the third quarter as a fully integrated commercial biopharmaceutical company. The official US launch of FINTEPLA occurred last week, on July 27, and we are excited that commercial product has been shipped in the first patient's enrolled into our REMS program.</p><p>Ashish will provide an update on our early launch progress and commercial activities. And I'll come back to discuss our ongoing development programs before Mike concludes with our financials for the quarter. Ashish, it's over to you.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Thank you, Steve. I'm excited to share our initial progress on the launch of FINTEPLA in the US, which is going extremely well, following the FDA approval on June 25th. Since then, we continue to see a very high level of enthusiasm for FINTEPLA from both physicians and caregivers, reflecting the need in this community and the potential that FINTEPLA has to provide in seizure control for more patients with Dravet Syndrome. As we mentioned previously, strong interest from the Dravet community prior to the approval led to the roll-out of our expanded access program. This program enables us to establish and refine high-quality processes within our specialty pharmacy distribution activity. It also help us to ensure that our supply chain was well prepared, through the outstanding teamwork of the entire Zogenix team in the United States and Europe, finished FINTEPLA product was delivered to our distribution hub within just a few weeks following the approval. This is especially notable during this unprecedented global pandemic.</p><p>The final objective of our initial commercial launch is to continue educating healthcare providers and caregivers on the company efficacy and safety profile of FINTEPLA and to guide healthcare providers on the process of becoming certified prescribers of FINTEPLA. To this end, the fintepla.com product website, social media researches and finteplarems.com, all went live in early July. I am very happy to report that to-date, more than 230 US healthcare providers, who have many Dravet patients under their care, have successfully enrolled in the FINTEPLA launch program and are now certified to prescribe FINTEPLA.</p><p>FINTEPLA REMS certification is an important first step for physicians to begin subscribing FINTEPLA to new patients in the US as well as to transition patients who are currently taking FINTEPLA in our ongoing open-label extension studies and expanded access program to the commercial product. This high level of engagement for prescribers has exceeded our expectations, especially given the current COVID-19 environment and it reinforces the substantial interest in the product that we have heard from the communities for some time now.</p><p>We recently conducted an educational webinar for caregivers, in collaboration with the Dravet Syndrome Foundation, which was attended by more than 80 members of the Dravet community. This webinar provided medical information about FINTEPLA and the details of our Zogenix Central patient services, our comprehensive patients support hub, and specialty pharmacies.</p><p>As Steve mentioned, last week, on July 27th, our field-based sales and medical affairs team [Indecipherable] full launch of FINTEPLA. They are now educating physicians on the efficacy and safety profile of FINTEPLA. This will facilitate enrollment in the REMS program and they are also educating the city [Phonetic] office staff on the resources available through Zogenix Central.</p><p>Our key account managers have successfully contacted all healthcare providers, who are currently keeping patients in our open label extension studies and expanded access program within the first few weeks following the FDA approval. We are now continuing our promotional focus to the approximately 450 physicians who care about 80% of the treated Dravet Syndrome patients in the United States. The availability of the approved label has also allowed us to advance our FINTEPLA coverage discussions with private payers, from Medicaid administrators. Prior to the approval, we had the opportunity to meet with substantial number of payers. We educate them on the potential benefits of and key safety information for FINTEPLA, but discussions on coverage decisions could happen only after the FDA approval.</p><p>We are very happy to report that we have already started receiving several positive coverage determinations, recognizing that some coverage determinations can take time during this initial launch period, Zogenix Central will continue to assist on individual cases in an effort to expedite the coverage.</p><p>In summary, we are off to a very exciting start and we are very proud to bring this potentially transformative therapy to Dravet patients and their families in the US and this becomes an important option to reduce the number of devastating seizures these patients typically experience. I want to thank Dravet community for their ongoing support and thank the healthcare providers who have already become certified FINTEPLA prescribers. Reiterating what Steve said, I would also like to congratulate the entire Zogenix team who have worked tirelessly to launch FINTEPLA within just a few weeks of receiving the FDA approval and during the ongoing COVID-19 pandemic.</p><p>Now, I will turn the call back to Steve. Steve?</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you, Ashish, for a great summary. In parallel to the US activities as Ashish has described, we continue to work with regulatory authorities to advance FINTEPLA and Dravet syndrome in other key regions. In Europe, the EMA's review of our marketing application is ongoing. Based on recent and encouraging progress, we anticipate CHMPs providing their opinion by the end of this year. In anticipation of a positive opinion, we are preparing for the potential launch of FINTEPLA in our first European country, Germany, in the first quarter of 2021. Additionally in Japan, we expect to have topline data from our Phase III pivotal trial in the fourth quarter of this year to support a planned JNDA submission in the first half of 2021.</p><p>Now I'd like to turn to our program for FINTEPLA in Lennox-Gastaut Syndrome or LGS. LGS is another rare and severe form of childhood-onset epilepsy. Unlike Dravet Syndrome, which is strongly correlated to variations in a specific gene, LGS can arise from multiple different causes, making seizures associated with LGS among the most difficult to effectively treat. A meeting with FDA has been scheduled for September, during which we will seek the agency's feedback on the non-clinical and clinical requirements to support our planned supplemental NDA or sNDA for FINTEPLA in LGS. As previously communicated, we have successfully completed a pivotal safety and efficacy Phase III trial, while are currently conducting special population Phase I pharmacokinetic trials and a two-year carcinogenicity study in rodents. Assuming data from these studies are required, we anticipate submitting an sNDA for FINTEPLA in LGS during the second quarter of 2021. As a reminder, the FDA has determined that based on an approval for FINTEPLA in Dravet syndrome, only one positive Phase III trial is required for LGS sNDA.</p><p>Now I'd like to switch to MT1621, our investigational therapy for the treatment of a devastating and frequently fatal mitochondrial DNA depletion disorder, called Thymidine Kinase 2 deficiency, or TK2d. MT1621 is an oral, fixed dose combination treatment of deoxycytidine and deoxythymidine that serves as substrate enhancement therapy to restore mitochondrial DNA and treat the progressive deficits in motor, respiratory and feeding functions that characterize this devastating disease. MT1621 has breakthrough therapy designation in the United States and PRIME designation in Europe, as well as orphan designation in both regions.</p><p>During the second quarter, we let twice for the FDA to discuss the development path for support of planned NDA submission for MT1621. We are very pleased with the outcome from these discussions, which supports our proposal that the survival benefit of treated patients as compared to an external historical control group is a reasonable basis for the NDA. As a reminder, we previously completed Study-101, a retrospective study of the combination of pyrimidine nucleosides in 38 patients with TK2d, which demonstrated a statistically significant, effective treatment on survival compared to an untreated control group of TK2 deficiency patients from the literature.</p><p>In addition to this analysis, the FDA requested that we obtain information on any additional treated patients who did not participate in a multi-sponsored study in order to have a complete survival analysis for the NDA. Note that in addition to our completed Study-101, we intend to include our ongoing prospective open label Study-102 as part of the NDA submission. Study-102 provides continued treatment with MT1621 for patients who participated in Study-101. Unfortunately, Study-102 has been impacted by COVID-19, as some patients, particularly those from outside the US and Europe are restricted from traveling to clinical sites to complete study assessments. However, patients have been able to continue uninterrupted treatment with MT1621 during this pandemic.</p><p>With respect to other feedback from the regulatory meetings, the FDA requested that we conduct a Phase I renal impairment pharmacokinetic study to provide dosing recommendations in the setting of impaired renal function.</p><p>Regarding non-clinical toxicology, we recently completed a six-month toxicology study in rats. The FDA also requested a toxicology study in dogs, but was willing to accept the study of a minimum of three months' duration versus the typical nine months, should we have concerns that the longer duration study would substantially delay the NDA submission. In addition, the FDA accepted all of CMC-related plans for the future submission. Assuming relaxation of certain restrictions related to COVID-19, we anticipate that all data for an NDA will be available by the end of 2021 in order to support the submission in the first half of 2022.</p><p>With that, let me hand over the call to Mike for his financial review. Mike?</p><p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p><p>Thanks, Steve, and good afternoon, everyone. Today, we issued a press release announcing our business and financial results for the second quarter ended June 30, 2020, which I'll now run through.</p><p>We recognized $1 million in revenue during the second quarter of 2020. This is a result of our exclusive distribution collaboration with Nippon Shinyaku for FINTEPLA in Dravet Syndrome and LGS in Japan, who recognized $1.1 million in revenue for the corresponding period in 2019. R&D expenses for the first quarter were $34.4 million, an increase of approximately $7 million from $27.1 million in the corresponding period of 2019. This increase is attributable to a modest increase in spending in our Study-1601 LGS Phase III study, development expenses related to our late-stage clinical candidate, MT1621, and an increase in personnel and R&D and operational costs, all partially offset by a decrease in spending in our Dravet Syndrome program, as a number of studies in that area have come to closure.</p><p>SG&A expenses for the first quarter ended June 30, 2020 totaled $24.4 million, compared with $15.5 million for the second quarter of the prior year. The increase of approximately $9 million is primarily driven by the continued investment related to the launch of FINTEPLA for the treatment of Dravet Syndrome in the US, which began in the current quarter and for the preparation related to prospectively launching in Europe at the beginning of 2021.</p><p>One additional important item to highlight in the quarter, we received payments from the UK government of $19.7 million tax fund and tax credit related to FINTEPLA development activities in 2017 and '18 that qualify under the UK small and medium-sized enterprises R&D tax relief scheme. This $20 million claim contributed to our quarter-end cash balance.</p><p>Net loss for the second quarter ended June 30, 2020, was $53.3 million or $0.96 per share, and this compared to the net loss of $37.8 million or $0.89 per share in the second quarter ended June 30, 2019. We ended the second quarter with a strong balance sheet with cash, cash equivalents and marketable securities totaling $390 million. This significant cash position allowed us to invest in a robust and successful market of FINTEPLA in Dravet Syndrome in the US and Europe and simultaneously advance our key late-stage programs for FINTEPLA in LGS and MT1621 for TK2d.</p><p>With that, I'll now turn the call over to the operator to start our Q&A session. Operator, can you please open the line for questions?</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-24420">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-24420');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>Thank you. [Operator Instructions] And we'll take our first question. It comes from Paul Matteis from Stifel.</p><p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>Hey guys, this is Nate, on for Paul. Thanks for taking the question. Maybe the first one, real quick. What launch metrics are you guys planning on providing, like patient starts or something else?</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Ashish, you'd like to take that question? Ashish, you're on mute.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>I'm sorry. Paul [Phonetic], thanks for the question. We'll be evaluating various metrics from our experience with the patients, clinicians as well as with the payers, that can provide reliable source of information and trend. As you know, we just launched last week and as we shared today, physician enrollment and completing certification on the REMS program is one of the key metrics, which is what we shared. And in the upcoming communication, we expect to provide more appropriate measures that will reflect the progress of the launch.</p><p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>Got you. And then, I think, you've said about 250 to 300 patients in the US from the Dravet OLE? What's the average dose they're on, on a per kilogram basis? And how quickly do you think they're going to transition over to the commercial drug?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Yeah. I think you're referring to the open label extension and the early access program patients. Did I get that right?</p><p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>Yeah, exactly.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Yes. So we are working on transitioning these patients. So first thing to keep in mind is that most of these patients have -- will not need to do a planned echo to start the therapy as the last echo they had done in the EAP and OLEs will be the part of their baseline. And I'm proud to say that we have been able to reach almost all the physicians in these programs, and they have now enrolled into their REMS. As we will be working on transitioning them as they have opted in the coverage, and then we are able to get them through the closure process that they need to do for the clinical trial. And the most important takeaway for here is that there is not going to be any interruption experienced by the patient during this transition. We do have a trial in this program and that will allow patients to continue receiving therapy as the coverage determination is being decided.</p><p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>Got you. And what average dose are they on?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>So the average dose that we talked last time was the average weight was 34.5, and the average dose was 0.52 milligram per kilogram.</p><p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p>Got it. Thanks very much.</p><p><strong>Brian Ritchie</strong> -- <em>Managing Director</em></p><p>Thanks for your questions.</p><p><strong>Operator</strong></p><p>Thank you. We can now move to our next question. This comes from Marc Goodman of SVB Leerink.</p><p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p><p>Hi, this is Roanna on the line for Marc. I have two. First, I don't know if I caught this during your prepared remarks, but for the MT1621 asset, could you clarify what the FDA was requiring for the clinical data portion? I know Modis has done some work previously and what extra work you're doing?</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah, I'd be happy to answer that. And also, Joanne Quan, Chief Medical Officer of Modis is on the line and she can also add if there's anything that I'm missing here. So from the clinical perspective, we've completed Study-101, which will be a major basis of the NDA because that's where we've been able to establish the survival benefit. This is natural history control. And we also will be including information from Study-102, which is an extension study for all those patients who are now taking MT1621 for the treatments of their disease. In addition to that, as I said in prepared remarks, Joanne and her team will be obtaining information on other patients who have been treated with deoxynucleoside that were not part of the Modis studies or our studies. So we'll be obtaining information from those patients in order to complete the survival analysis set for the NDA. In addition to that, the FDA did ask us to conduct a study in renal impairment. So that's a Phase I study. So that will also be part of the clinical package for the NDA.</p><p>And Joanne, let me know if I've missed anything that you'd like to add.</p><p><strong>Joanne Quan</strong> -- <em>Chief Medical Officer, Modis Therapeutics</em></p><p>No. I think that's it. Does that address your question?</p><p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p><p>Yeah, that helped. And then one quick one, switching back to FINTEPLA. With the REMs enrollment and certification over-time, can you talk a bit about -- are these physicians mostly from, like academic centers or other sites? And how did it look going into July?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Yes. Thanks for the question, Roanna. I think the certifications we have so far, they are mixed. They are from the academic centers. They are from the community centers and these are, which -- as I said in our prepared remarks, are around 450 epileptologists and pediatric neurologists who treat about 80% of the Dravet patients. And I think we've been able to reach and get almost half of them certified through this process. I hope that answers to your question.</p><p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p><p>Yeah. And just, if you have any anecdotal comments about July?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>At this time, no, because we've just launched last week, and we are watching the trend. And one thing I would say is, we are really excited with the response that we have got from the physicians, caregivers, and also some of the payers that we have had the conversation. So we are really feeling be very confident that we'll be able to bring this therapy to most of the patients as we go through the launch process.</p><p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p><p>Sorry. Can I ask what your question on July is?</p><p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p><p>I was just wondering about the REMS cadence over-time, basically.</p><p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p><p>Yeah. So the number we've given was kind of basically a reflection of what happens in July, [Indecipherable]. That's all.</p><p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p><p>Okay. Thank you.</p><p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p><p>That's correct, yeah.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah. And the other way to say it, Roanna, is that, obviously, we're seeing a really great movement to our physicians into the REMS program, I think, which underscores, I think, the important Stage 3 of this drug in the treatment of Dravet Syndrome. So getting 230-plus physicians enrolled into the REMS in less than one week, I think, is a really good start for us.</p><p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p><p>Sounds good. Thanks.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Thank you. And we'll move to our next question. This comes from Yatin Suneja of Guggenheim Partners.</p><p><strong>Eddie Hickman</strong> -- <em>Guggenheim Securities, LLC -- Analyst</em></p><p>Hi guys, this is Eddie on for Yatin. Congrats on the launch. I was just wondering if you could give us a sense of how long it will take to get the broader reimbursement for FINTEPLA? And is there certain states that can get it first? And how long it will take some of the slower states like Texas and Florida to get reimbursement? And then, what are your expectations for gross to net and Epidiolex is about 20%. Is that a reasonable assumption for FINTEPLA? Thanks.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Ashish, go ahead and take those questions.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Yeah. So from the broader reimbursement perspective, as you know, the launch time, it does take time. And generally, what you have seen in some of the recent launches that it has taken up to six months to get the entire coverage. You have some states like Texas, which may take up to six months. Yeah, and there are some states, may happen in the next three months. And then we also have private payers, they have their own P&T reviews. Now we have got a schedule on them. We have scheduled the meetings and providing them the information. So I think over the next six months, we will see a huge increase in the coverage. So that is on the coverage side.</p><p>From the gross to net, I think, it will be very premature to provide any guidance at this point in time. We'll be evaluating how the launch goes, but more importantly, how we get the coverage. And based on that, in future, we may provide guidance on that.</p><p><strong>Eddie Hickman</strong> -- <em>Guggenheim Securities, LLC -- Analyst</em></p><p>Thanks. And then just one last one. For the Medicaid population, have you seen that number increase, given the pandemic and some of the increases that are seen in the country of unemployment? Do you expect that Medicaid ratio to change?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Yeah. So in general, if you look at the population, we can kind of look at the numbers, and say, yes, the Medicaid patient population should increase. In terms of our population and of what we are seeing, it's too early to say anything because it's been just eight working days since we have started promoting. But we expect that and we anticipate that will be similar to what we have seen in some of the other products, like the GW product, up to 55% and 60% of the patients are on Medicaid or some form of government paid insurance.</p><p><strong>Eddie Hickman</strong> -- <em>Guggenheim Securities, LLC -- Analyst</em></p><p>Thank you so much.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Thank you. And we can now move to our next question. This comes from Difei Yang of Mizuho.</p><p><strong>Alexander Lim</strong> -- <em>Mizuho Americas LLC -- Analyst</em></p><p>Okay. Good afternoon, everyone. This is Alex on for Difei. I just had another question on the insurance coverage. Just in terms of the coverage determinations, you noted a few positive determinations already. Can you just comment if that's tracking sort of along your expectations or a little bit ahead? Any additional color around that would be helpful.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Yeah. Thanks for the question, Alex. At this point in time, it's tracking per our expectations and the work that we have done prior to the launch in educating the payers and the relationship that we have built is really coming to the bear at this point in time. So I would say it's tracking to the expectation.</p><p><strong>Alexander Lim</strong> -- <em>Mizuho Americas LLC -- Analyst</em></p><p>Okay, great. Thank you. And then just one more question on MT1621. Do you have any plans to disclose any additional follow-up data, I guess, at some point in the next few months or so?</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Joanne, do you want to take that one? We will be attending [Indecipherable]. So maybe you can say a few things about that.</p><p><strong>Joanne Quan</strong> -- <em>Chief Medical Officer, Modis Therapeutics</em></p><p>Sure. We have several abstracts that we'll be presenting [Indecipherable] in terms of the 1621 program. So I think that would be next point, at which we will be able to share that commentary.</p><p><strong>Alexander Lim</strong> -- <em>Mizuho Americas LLC -- Analyst</em></p><p>Great. Thank you.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Thank you. And we will move to our next question. This comes from Serge Belanger of Needham & Company.</p><p><strong>Tian Sun</strong> -- <em>Needham & Company -- Analyst</em></p><p>Hi, good afternoon. This is Tian, on for Serge. I got two questions. So the first one, it's about REMS. So in terms of the Dravet patients themselves, how fast do you expect them to enroll into the REMS program versus doctors and physicians. And are you going to be disclosing these numbers in the coming quarters?</p><p>And then the second question is the Phase III Japanese trial. Could you remind us, is there any type of milestone payments that are tied to the readout of that trial in 4Q? And any other regulatory milestones with the NDA submission in Japan. Thank you.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Ashish, take the first two questions, and maybe, Mike, you can take the question about Nippon Shinyaku after that?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Yeah. So in terms of Dravet patients enrolling into the REMS program, it depends on what type of patient they are. As I said earlier, these patients are from early access program on the clinical trial. Their enrollment is going to be fairly smooth because they do not have to go through the echo. And what we believe is that based on when they are able to visit their physician, they should be to enroll pretty seamlessly and quickly. One thing is, we have the REMS documents and the enrollment documents, are available on the website, they're available in their mobiles. Your can download from the mobile devices. You can electronically sign them, so we have made it much easier.</p><p>For the naive patients, it takes almost the same time, I think the only step there is going to be the naive patients will have to go through an echo process. So they will have to do an echo. And that takes -- as we said earlier, it will take anywhere between two to four weeks, depending on your ability to find the appointment, going to the institute and depending on that particular institute where the echo is available or any other place. But so far, what we have seen in the last, I would say, a week and half, those enrollments are going as smoothly as we had expected. Mike?</p><p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p><p>Yeah. Through our collaboration with Nippon Shinyaku, there are a couple of payments that relate to the JNDA submission for Dravet as well as for LGS and Dravet, much more in the near term -- a lot more in near term than the LGS study on the near-term horizon. The amounts that are tied to our submission, approved and then subsequently a price listing, which comes in Japan right after an approval. So it's in the neighborhood of the mid-teens, in combination of both those, in terms of milestone payments. And then, LGS, which is ongoing as well, and will come at, come in a little bit at the time after Dravet, have those same types of the milestone payments and those milestone payments are in the high-20 [Phonetic] combined.</p><p><strong>Tian Sun</strong> -- <em>Needham & Company -- Analyst</em></p><p>Got it. Thank you.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah. Thank you for your questions.</p><p><strong>Operator</strong></p><p>Thank you. And we'll then move to our next question from Tim Lugo of William Blair.</p><p><strong>John Boyle</strong> -- <em>William Blair & Company L.L.C. -- Analyst</em></p><p>Hi, this is John on for Tim. Thanks for the questions. Just two from us. So first, I'm just wondering how you guys are thinking about prioritizing getting additional sites REMS certified. Are you more focused on specific regions given the local state of the pandemic or are you more focused on other factors like size and potential number of patients?</p><p>And second, I'm not sure if I missed it in the prepared remarks. Do you have any updates on the basket study of FINTEPLA? And if you haven't updated us, is there anything you're looking for to see before you start restarting it? Thanks.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Steve, I will take the first one and give it to you. So in terms of -- John, in terms of prioritization, we're prioritizing on these key epileptologists, as I said in the remarks. There are around 450 epileptologists and pediatric neurologists who treat approximately 80% of the patients. So we'll be reaching to them first and this is where our entire field team's focus is going to be in the initial phase of the launch. And once that is done, then we're going to go to the next one. There is no, what I call it, is a limitation from the geography or because of the COVID situation, primarily, because we've been able to connect with these offices, if not in person, through telephone, through the Zoom calls. And we have made the entire enrollment process available online. And most of these solutions have enrolled online and very easily from different devices.</p><p>So hopefully that answers your question, but we'll go first with [Indecipherable] epileptologists and then to the next set. Steve?</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Yeah. Thanks. John, with respect to the basket study, as you know, we've put that on pause because of the COVID-19 situation and really a realization, it was difficult and probably inappropriate to initiate a new clinical study at the time. So we have clearly kept our eye on what's going on since we had approval in of FINTEPLA today. We have started to see if there's opportunities to look to get this study back up and running. I don't have any time lines on that right now, but we are actively evaluating well enough if there's an opportunity to at least get some of these cohorts of patients into the study, just to sort of recall for everyone into the study, where we're bringing in several different epileptic encephalopathies or severe epilepsies under one protocol, and they will be divided into various cohorts. And we're looking to see if we can get some of these cohorts up and running. So we'll talk certainly more about that once we've got some more information.</p><p><strong>John Boyle</strong> -- <em>William Blair & Company L.L.C. -- Analyst</em></p><p>All right. Great. And congrats on the launch.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Thank you very much.</p><p><strong>Operator</strong></p><p>[Operator Instructions] And we now move to our next question. This comes from Michael Higgins of Ladenburg Thalmann.</p><p><strong>Michael John Higgins</strong> -- <em>Ladenburg Thalmann & Co. -- Analyst</em></p><p>Thanks Operator. I have two questions. First of all, congrats on the launch of your [Indecipherable] benefited by the online launch characteristics. You've also mentioned 230 healthcare providers being signed up so far. If you could just give us a little breakout of that. I assume you have included physicians and nurses. So how many sites of the 230 is spread across and given the target goals for the back half of 2020?</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you, Michael. Ashish, do you have that breakdown for Michael?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>At this time I don't have the breakdown, but what I can tell you confidently that more than 95% of these will be physicians because we've been able to reach all of them. What we do know is that there are few physician assistants, they are nurse practitioners, have signed up because they were part of the early access program on the clinical trial sites. But we can come back to you and give you that breakdown in terms of how many physicians. And in terms of the target goal, as I said earlier, our goal is to get all these 450 key epileptologists signed up as early as possible and then move on to the next target, which is the epileptologists who may be treating maybe one or two Dravet patients, but we want to make sure that we reached them and enrolled them for the REMS, so that they can offer FINTEPLA to their patients.</p><p><strong>Michael John Higgins</strong> -- <em>Ladenburg Thalmann & Co. -- Analyst</em></p><p>Okay. That's helpful. Thank you. And just maybe sort of help with this. You mentioned on prior calls as well as this one that no patient will miss a dose. I assume that there is some sort of a protocol for handling those patients during a transition period. How do you look at that? Is that something that every month, they sent a month's supply to do that for several months at a time? How is that normally handled?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>Let me playback your question so that I understood it. So the question is regarding the transition, how do we handle the dose? And how much do we supply as we send during this transition period? Did I get that right?</p><p><strong>Michael John Higgins</strong> -- <em>Ladenburg Thalmann & Co. -- Analyst</em></p><p>Yeah.</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>So at this point in time, based on -- and we follow the same guideline as what we get from the insurance companies that during the transition, we will be providing 30 days at a time, and we will continue to follow-up based on how the coverage determination is made. And then based on that, we will continue to either provide the transition products or switch to a commercial covered product.</p><p><strong>Michael John Higgins</strong> -- <em>Ladenburg Thalmann & Co. -- Analyst</em></p><p>What is the typical transition period?</p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p>At this time, it's really early to say because we just started this last week. So we will have better metrics, hopefully in the future. But at this point in time, it will be too premature to say the numbers here.</p><p><strong>Michael John Higgins</strong> -- <em>Ladenburg Thalmann & Co. -- Analyst</em></p><p>Okay. I appreciate the feedback. Thanks guys.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you.</p><p><strong>Operator</strong></p><p>Thank you. And at this time, we have no further questions. So I'll hand the call back to Dr. Stephen Farr.</p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p>Thank you, operator, and thank you all for joining us on our call today. We are very, very pleased, extremely pleased to share our progress, becoming a commercial-stage, rare disease company with a strong pipeline of very promising therapeutic candidates. Those candidates are really showing tremendous efficacy in some devastating diseases. I look forward to providing with further updates on our launch programs and clinical activity. So thank you all, again, for joining us on our call today, and enjoy the rest of your day.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 41 minutes</strong></p><h2>Call participants:</h2><p><strong>Brian Ritchie</strong> -- <em>Managing Director</em></p><p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p><p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p><p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p><p><strong>Joanne Quan</strong> -- <em>Chief Medical Officer, Modis Therapeutics</em></p><p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p><p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p><p><strong>Eddie Hickman</strong> -- <em>Guggenheim Securities, LLC -- Analyst</em></p><p><strong>Alexander Lim</strong> -- <em>Mizuho Americas LLC -- Analyst</em></p><p><strong>Tian Sun</strong> -- <em>Needham & Company -- Analyst</em></p><p><strong>John Boyle</strong> -- <em>William Blair & Company L.L.C. -- Analyst</em></p><p><strong>Michael John Higgins</strong> -- <em>Ladenburg Thalmann & Co. -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/zgnx">More ZGNX analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zogenix, Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZogenix%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=199c99ba-b068-4893-a4b1-020ee7ff315b">ten best stocks</a></strong> for investors to buy right now… and Zogenix, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZogenix%252C%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=199c99ba-b068-4893-a4b1-020ee7ff315b" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-87812", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZGNX"], "primary_tickers_companies": ["Zogenix, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zogenix Inc (ZGNX) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 61, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-87812"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-87812", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZGNX"], "primary_tickers_companies": ["Zogenix, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zogenix Inc (ZGNX) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 61, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ZGNX earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Zogenix Inc</strong> <span class="ticker" data-id="224981">(<a href="https://www.fool.com/quote/nasdaq/zogenix-inc/zgnx/">NASDAQ:ZGNX</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 5, 2020</span>, <em id="time">4:30 p.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Good day, and welcome to the Zogenix Second Quarter 2020 Earnings Call. Today's conference is being recorded.</p>, <p>At this time, I would like to turn the conference over to Brian Ritchie, LifeSci Advisors. Please go ahead.</p>, <p><strong>Brian Ritchie</strong> -- <em>Managing Director</em></p>, <p>Thank you, operator. And thank you all for joining us this afternoon. With me on today's call are Chief Executive Officer, Dr. Stephen Farr; Chief Commercial Officer, Ashish Sagrolikar; and Chief Financial Officer, Michael Smith; as well as Dr. Joanne Quan, Chief Medical Officer of Modis Therapeutics, a Zogenix company.</p>, <p>This afternoon, Zogenix issued a news release providing a business update, announcing financial results for the second quarter ended June 30th, 2020. Please note that certain information discussed on the call today is covered under the safe harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in Zogenix' press release issued today and the company's SEC filings, including in the Annual Report on Form 10-K and subsequent filings.</p>, <p>This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, August 5th, 2020. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.</p>, <p>Now, I'd like to turn the call over to Steve. Go ahead, Steve.</p>, <p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Thank you, Brian, and good afternoon to everyone. We ended the previous quarter with the great news that FINTEPLA had received FDA approval for the treatment of seizures associated with Dravet Syndrome. This is our first drug approval since we pivoted our strategy to focus on developing and commercializing transformative therapies for rare diseases, and as a result of the tremendous work and dedication of all my colleagues at Zogenix. Once again, I would like to thank the patients, families and investigators, who participated in our clinical program for all they have done to help us achieve this tremendous milestone. This approval has enabled us to enter the third quarter as a fully integrated commercial biopharmaceutical company. The official US launch of FINTEPLA occurred last week, on July 27, and we are excited that commercial product has been shipped in the first patient's enrolled into our REMS program.</p>, <p>Ashish will provide an update on our early launch progress and commercial activities. And I'll come back to discuss our ongoing development programs before Mike concludes with our financials for the quarter. Ashish, it's over to you.</p>, <p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p>, <p>Thank you, Steve. I'm excited to share our initial progress on the launch of FINTEPLA in the US, which is going extremely well, following the FDA approval on June 25th. Since then, we continue to see a very high level of enthusiasm for FINTEPLA from both physicians and caregivers, reflecting the need in this community and the potential that FINTEPLA has to provide in seizure control for more patients with Dravet Syndrome. As we mentioned previously, strong interest from the Dravet community prior to the approval led to the roll-out of our expanded access program. This program enables us to establish and refine high-quality processes within our specialty pharmacy distribution activity. It also help us to ensure that our supply chain was well prepared, through the outstanding teamwork of the entire Zogenix team in the United States and Europe, finished FINTEPLA product was delivered to our distribution hub within just a few weeks following the approval. This is especially notable during this unprecedented global pandemic.</p>, <p>The final objective of our initial commercial launch is to continue educating healthcare providers and caregivers on the company efficacy and safety profile of FINTEPLA and to guide healthcare providers on the process of becoming certified prescribers of FINTEPLA. To this end, the fintepla.com product website, social media researches and finteplarems.com, all went live in early July. I am very happy to report that to-date, more than 230 US healthcare providers, who have many Dravet patients under their care, have successfully enrolled in the FINTEPLA launch program and are now certified to prescribe FINTEPLA.</p>, <p>FINTEPLA REMS certification is an important first step for physicians to begin subscribing FINTEPLA to new patients in the US as well as to transition patients who are currently taking FINTEPLA in our ongoing open-label extension studies and expanded access program to the commercial product. This high level of engagement for prescribers has exceeded our expectations, especially given the current COVID-19 environment and it reinforces the substantial interest in the product that we have heard from the communities for some time now.</p>, <p>We recently conducted an educational webinar for caregivers, in collaboration with the Dravet Syndrome Foundation, which was attended by more than 80 members of the Dravet community. This webinar provided medical information about FINTEPLA and the details of our Zogenix Central patient services, our comprehensive patients support hub, and specialty pharmacies.</p>, <p>As Steve mentioned, last week, on July 27th, our field-based sales and medical affairs team [Indecipherable] full launch of FINTEPLA. They are now educating physicians on the efficacy and safety profile of FINTEPLA. This will facilitate enrollment in the REMS program and they are also educating the city [Phonetic] office staff on the resources available through Zogenix Central.</p>, <p>Our key account managers have successfully contacted all healthcare providers, who are currently keeping patients in our open label extension studies and expanded access program within the first few weeks following the FDA approval. We are now continuing our promotional focus to the approximately 450 physicians who care about 80% of the treated Dravet Syndrome patients in the United States. The availability of the approved label has also allowed us to advance our FINTEPLA coverage discussions with private payers, from Medicaid administrators. Prior to the approval, we had the opportunity to meet with substantial number of payers. We educate them on the potential benefits of and key safety information for FINTEPLA, but discussions on coverage decisions could happen only after the FDA approval.</p>, <p>We are very happy to report that we have already started receiving several positive coverage determinations, recognizing that some coverage determinations can take time during this initial launch period, Zogenix Central will continue to assist on individual cases in an effort to expedite the coverage.</p>, <p>In summary, we are off to a very exciting start and we are very proud to bring this potentially transformative therapy to Dravet patients and their families in the US and this becomes an important option to reduce the number of devastating seizures these patients typically experience. I want to thank Dravet community for their ongoing support and thank the healthcare providers who have already become certified FINTEPLA prescribers. Reiterating what Steve said, I would also like to congratulate the entire Zogenix team who have worked tirelessly to launch FINTEPLA within just a few weeks of receiving the FDA approval and during the ongoing COVID-19 pandemic.</p>, <p>Now, I will turn the call back to Steve. Steve?</p>, <p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Thank you, Ashish, for a great summary. In parallel to the US activities as Ashish has described, we continue to work with regulatory authorities to advance FINTEPLA and Dravet syndrome in other key regions. In Europe, the EMA's review of our marketing application is ongoing. Based on recent and encouraging progress, we anticipate CHMPs providing their opinion by the end of this year. In anticipation of a positive opinion, we are preparing for the potential launch of FINTEPLA in our first European country, Germany, in the first quarter of 2021. Additionally in Japan, we expect to have topline data from our Phase III pivotal trial in the fourth quarter of this year to support a planned JNDA submission in the first half of 2021.</p>, <p>Now I'd like to turn to our program for FINTEPLA in Lennox-Gastaut Syndrome or LGS. LGS is another rare and severe form of childhood-onset epilepsy. Unlike Dravet Syndrome, which is strongly correlated to variations in a specific gene, LGS can arise from multiple different causes, making seizures associated with LGS among the most difficult to effectively treat. A meeting with FDA has been scheduled for September, during which we will seek the agency's feedback on the non-clinical and clinical requirements to support our planned supplemental NDA or sNDA for FINTEPLA in LGS. As previously communicated, we have successfully completed a pivotal safety and efficacy Phase III trial, while are currently conducting special population Phase I pharmacokinetic trials and a two-year carcinogenicity study in rodents. Assuming data from these studies are required, we anticipate submitting an sNDA for FINTEPLA in LGS during the second quarter of 2021. As a reminder, the FDA has determined that based on an approval for FINTEPLA in Dravet syndrome, only one positive Phase III trial is required for LGS sNDA.</p>, <p>Now I'd like to switch to MT1621, our investigational therapy for the treatment of a devastating and frequently fatal mitochondrial DNA depletion disorder, called Thymidine Kinase 2 deficiency, or TK2d. MT1621 is an oral, fixed dose combination treatment of deoxycytidine and deoxythymidine that serves as substrate enhancement therapy to restore mitochondrial DNA and treat the progressive deficits in motor, respiratory and feeding functions that characterize this devastating disease. MT1621 has breakthrough therapy designation in the United States and PRIME designation in Europe, as well as orphan designation in both regions.</p>, <p>During the second quarter, we let twice for the FDA to discuss the development path for support of planned NDA submission for MT1621. We are very pleased with the outcome from these discussions, which supports our proposal that the survival benefit of treated patients as compared to an external historical control group is a reasonable basis for the NDA. As a reminder, we previously completed Study-101, a retrospective study of the combination of pyrimidine nucleosides in 38 patients with TK2d, which demonstrated a statistically significant, effective treatment on survival compared to an untreated control group of TK2 deficiency patients from the literature.</p>, <p>In addition to this analysis, the FDA requested that we obtain information on any additional treated patients who did not participate in a multi-sponsored study in order to have a complete survival analysis for the NDA. Note that in addition to our completed Study-101, we intend to include our ongoing prospective open label Study-102 as part of the NDA submission. Study-102 provides continued treatment with MT1621 for patients who participated in Study-101. Unfortunately, Study-102 has been impacted by COVID-19, as some patients, particularly those from outside the US and Europe are restricted from traveling to clinical sites to complete study assessments. However, patients have been able to continue uninterrupted treatment with MT1621 during this pandemic.</p>, <p>With respect to other feedback from the regulatory meetings, the FDA requested that we conduct a Phase I renal impairment pharmacokinetic study to provide dosing recommendations in the setting of impaired renal function.</p>, <p>Regarding non-clinical toxicology, we recently completed a six-month toxicology study in rats. The FDA also requested a toxicology study in dogs, but was willing to accept the study of a minimum of three months' duration versus the typical nine months, should we have concerns that the longer duration study would substantially delay the NDA submission. In addition, the FDA accepted all of CMC-related plans for the future submission. Assuming relaxation of certain restrictions related to COVID-19, we anticipate that all data for an NDA will be available by the end of 2021 in order to support the submission in the first half of 2022.</p>, <p>With that, let me hand over the call to Mike for his financial review. Mike?</p>, <p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p>, <p>Thanks, Steve, and good afternoon, everyone. Today, we issued a press release announcing our business and financial results for the second quarter ended June 30, 2020, which I'll now run through.</p>, <p>We recognized $1 million in revenue during the second quarter of 2020. This is a result of our exclusive distribution collaboration with Nippon Shinyaku for FINTEPLA in Dravet Syndrome and LGS in Japan, who recognized $1.1 million in revenue for the corresponding period in 2019. R&D expenses for the first quarter were $34.4 million, an increase of approximately $7 million from $27.1 million in the corresponding period of 2019. This increase is attributable to a modest increase in spending in our Study-1601 LGS Phase III study, development expenses related to our late-stage clinical candidate, MT1621, and an increase in personnel and R&D and operational costs, all partially offset by a decrease in spending in our Dravet Syndrome program, as a number of studies in that area have come to closure.</p>, <p>SG&A expenses for the first quarter ended June 30, 2020 totaled $24.4 million, compared with $15.5 million for the second quarter of the prior year. The increase of approximately $9 million is primarily driven by the continued investment related to the launch of FINTEPLA for the treatment of Dravet Syndrome in the US, which began in the current quarter and for the preparation related to prospectively launching in Europe at the beginning of 2021.</p>, <p>One additional important item to highlight in the quarter, we received payments from the UK government of $19.7 million tax fund and tax credit related to FINTEPLA development activities in 2017 and '18 that qualify under the UK small and medium-sized enterprises R&D tax relief scheme. This $20 million claim contributed to our quarter-end cash balance.</p>, <p>Net loss for the second quarter ended June 30, 2020, was $53.3 million or $0.96 per share, and this compared to the net loss of $37.8 million or $0.89 per share in the second quarter ended June 30, 2019. We ended the second quarter with a strong balance sheet with cash, cash equivalents and marketable securities totaling $390 million. This significant cash position allowed us to invest in a robust and successful market of FINTEPLA in Dravet Syndrome in the US and Europe and simultaneously advance our key late-stage programs for FINTEPLA in LGS and MT1621 for TK2d.</p>, <p>With that, I'll now turn the call over to the operator to start our Q&A session. Operator, can you please open the line for questions?</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-24420">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-24420');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>Thank you. [Operator Instructions] And we'll take our first question. It comes from Paul Matteis from Stifel.</p>, <p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>Hey guys, this is Nate, on for Paul. Thanks for taking the question. Maybe the first one, real quick. What launch metrics are you guys planning on providing, like patient starts or something else?</p>, <p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Ashish, you'd like to take that question? Ashish, you're on mute.</p>, <p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p>, <p>I'm sorry. Paul [Phonetic], thanks for the question. We'll be evaluating various metrics from our experience with the patients, clinicians as well as with the payers, that can provide reliable source of information and trend. As you know, we just launched last week and as we shared today, physician enrollment and completing certification on the REMS program is one of the key metrics, which is what we shared. And in the upcoming communication, we expect to provide more appropriate measures that will reflect the progress of the launch.</p>, <p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>Got you. And then, I think, you've said about 250 to 300 patients in the US from the Dravet OLE? What's the average dose they're on, on a per kilogram basis? And how quickly do you think they're going to transition over to the commercial drug?</p>, <p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p>, <p>Yeah. I think you're referring to the open label extension and the early access program patients. Did I get that right?</p>, <p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>Yeah, exactly.</p>, <p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p>, <p>Yes. So we are working on transitioning these patients. So first thing to keep in mind is that most of these patients have -- will not need to do a planned echo to start the therapy as the last echo they had done in the EAP and OLEs will be the part of their baseline. And I'm proud to say that we have been able to reach almost all the physicians in these programs, and they have now enrolled into their REMS. As we will be working on transitioning them as they have opted in the coverage, and then we are able to get them through the closure process that they need to do for the clinical trial. And the most important takeaway for here is that there is not going to be any interruption experienced by the patient during this transition. We do have a trial in this program and that will allow patients to continue receiving therapy as the coverage determination is being decided.</p>, <p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>Got you. And what average dose are they on?</p>, <p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p>, <p>So the average dose that we talked last time was the average weight was 34.5, and the average dose was 0.52 milligram per kilogram.</p>, <p><strong>Nathaniel Tower</strong> -- <em>Stifel, Nicolaus & Company -- Analyst</em></p>, <p>Got it. Thanks very much.</p>, <p><strong>Brian Ritchie</strong> -- <em>Managing Director</em></p>, <p>Thanks for your questions.</p>, <p><strong>Operator</strong></p>, <p>Thank you. We can now move to our next question. This comes from Marc Goodman of SVB Leerink.</p>, <p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p>, <p>Hi, this is Roanna on the line for Marc. I have two. First, I don't know if I caught this during your prepared remarks, but for the MT1621 asset, could you clarify what the FDA was requiring for the clinical data portion? I know Modis has done some work previously and what extra work you're doing?</p>, <p><strong>Stephen J. Farr</strong> -- <em>President and Chief Executive Officer</em></p>, <p>Yeah, I'd be happy to answer that. And also, Joanne Quan, Chief Medical Officer of Modis is on the line and she can also add if there's anything that I'm missing here. So from the clinical perspective, we've completed Study-101, which will be a major basis of the NDA because that's where we've been able to establish the survival benefit. This is natural history control. And we also will be including information from Study-102, which is an extension study for all those patients who are now taking MT1621 for the treatments of their disease. In addition to that, as I said in prepared remarks, Joanne and her team will be obtaining information on other patients who have been treated with deoxynucleoside that were not part of the Modis studies or our studies. So we'll be obtaining information from those patients in order to complete the survival analysis set for the NDA. In addition to that, the FDA did ask us to conduct a study in renal impairment. So that's a Phase I study. So that will also be part of the clinical package for the NDA.</p>, <p>And Joanne, let me know if I've missed anything that you'd like to add.</p>, <p><strong>Joanne Quan</strong> -- <em>Chief Medical Officer, Modis Therapeutics</em></p>, <p>No. I think that's it. Does that address your question?</p>, <p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p>, <p>Yeah, that helped. And then one quick one, switching back to FINTEPLA. With the REMs enrollment and certification over-time, can you talk a bit about -- are these physicians mostly from, like academic centers or other sites? And how did it look going into July?</p>, <p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p>, <p>Yes. Thanks for the question, Roanna. I think the certifications we have so far, they are mixed. They are from the academic centers. They are from the community centers and these are, which -- as I said in our prepared remarks, are around 450 epileptologists and pediatric neurologists who treat about 80% of the Dravet patients. And I think we've been able to reach and get almost half of them certified through this process. I hope that answers to your question.</p>, <p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p>, <p>Yeah. And just, if you have any anecdotal comments about July?</p>, <p><strong>Ashish Sagrolikar</strong> -- <em>Executive Vice President and Chief Commercial Officer</em></p>, <p>At this time, no, because we've just launched last week, and we are watching the trend. And one thing I would say is, we are really excited with the response that we have got from the physicians, caregivers, and also some of the payers that we have had the conversation. So we are really feeling be very confident that we'll be able to bring this therapy to most of the patients as we go through the launch process.</p>, <p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p>, <p>Sorry. Can I ask what your question on July is?</p>, <p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p>, <p>I was just wondering about the REMS cadence over-time, basically.</p>, <p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p>, <p>Yeah. So the number we've given was kind of basically a reflection of what happens in July, [Indecipherable]. That's all.</p>, <p><strong>Roanna Ruiz</strong> -- <em>SVB Leerink LLC -- Analyst</em></p>, <p>Okay. Thank you.</p>, <p><strong>Michael P. Smith</strong> -- <em>Executive Vice President, Chief Financial Officer, Treasurer and Secretary</em></p>, <p>That's correct, yeah.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-87812", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZGNX"], "primary_tickers_companies": ["Zogenix, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zogenix Inc (ZGNX) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 61, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-87812"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-87812", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZGNX"], "primary_tickers_companies": ["Zogenix, Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zogenix Inc (ZGNX) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 61, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ZGNX earnings call for the period ending June 30, 2020. | Good day, and welcome to the Zogenix Second Quarter 2020 Earnings Call. Today's conference is being recorded.\n At this time, I would like to turn the conference over to Brian Ritchie, LifeSci Advisors. Please go ahead.\n Thank you, operator. And thank you all for joining us this afternoon. With me on today's call are Chief Executive Officer, Dr. Stephen Farr; Chief Commercial Officer, Ashish Sagrolikar; and Chief Financial Officer, Michael Smith; as well as Dr. Joanne Quan, Chief Medical Officer of Modis Therapeutics, a Zogenix company.\n This afternoon, Zogenix issued a news release providing a business update, announcing financial results for the second quarter ended June 30th, 2020. Please note that certain information discussed on the call today is covered under the safe harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in Zogenix' press release issued today and the company's SEC filings, including in the Annual Report on Form 10-K and subsequent filings.\n This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, August 5th, 2020. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.\n Now, I'd like to turn the call over to Steve. Go ahead, Steve.\n Thank you, Brian, and good afternoon to everyone. We ended the previous quarter with the great news that FINTEPLA had received FDA approval for the treatment of seizures associated with Dravet Syndrome. This is our first drug approval since we pivoted our strategy to focus on developing and commercializing transformative therapies for rare diseases, and as a result of the tremendous work and dedication of all my colleagues at Zogenix. Once again, I would like to thank the patients, families and investigators, who participated in our clinical program for all they have done to help us achieve this tremendous milestone. This approval has enabled us to enter the third quarter as a fully integrated commercial biopharmaceutical company. The official US launch of FINTEPLA occurred last week, on July 27, and we are excited that commercial product has been shipped in the first patient's enrolled into our REMS program.\n Ashish will provide an update on our early launch progress and commercial activities. And I'll come back to discuss our ongoing development programs before Mike concludes with our financials for the quarter. Ashish, it's over to you.\n Thank you, Steve. I'm excited to share our initial progress on the launch of FINTEPLA in the US, which is going extremely well, following the FDA approval on June 25th. Since then, we continue to see a very high level of enthusiasm for FINTEPLA from both physicians and caregivers, reflecting the need in this community and the potential that FINTEPLA has to provide in seizure control for more patients with Dravet Syndrome. As we mentioned previously, strong interest from the Dravet community prior to the approval led to the roll-out of our expanded access program. This program enables us to establish and refine high-quality processes within our specialty pharmacy distribution activity. It also help us to ensure that our supply chain was well prepared, through the outstanding teamwork of the entire Zogenix team in the United States and Europe, finished FINTEPLA product was delivered to our distribution hub within just a few weeks following the approval. This is especially notable during this unprecedented global pandemic.\n The final objective of our initial commercial launch is to continue educating healthcare providers and caregivers on the company efficacy and safety profile of FINTEPLA and to guide healthcare providers on the process of becoming certified prescribers of FINTEPLA. To this end, the fintepla.com product website, social media researches and finteplarems.com, all went live in early July. I am very happy to report that to-date, more than 230 US healthcare providers, who have many Dravet patients under their care, have successfully enrolled in the FINTEPLA launch program and are now certified to prescribe FINTEPLA.\n FINTEPLA REMS certification is an important first step for physicians to begin subscribing FINTEPLA to new patients in the US as well as to transition patients who are currently taking FINTEPLA in our ongoing open-label extension studies and expanded access program to the commercial product. This high level of engagement for prescribers has exceeded our expectations, especially given the current COVID-19 environment and it reinforces the substantial interest in the product that we have heard from the communities for some time now.\n We recently conducted an educational webinar for caregivers, in collaboration with the Dravet Syndrome Foundation, which was attended by more than 80 members of the Dravet community. This webinar provided medical information about FINTEPLA and the details of our Zogenix Central patient services, our comprehensive patients support hub, and specialty pharmacies.\n As Steve mentioned, last week, on July 27th, our field-based sales and medical affairs team [Indecipherable] full launch of FINTEPLA. They are now educating physicians on the efficacy and safety profile of FINTEPLA. This will facilitate enrollment in the REMS program and they are also educating the city [Phonetic] office staff on the resources available through Zogenix Central.\n Our key account managers have successfully contacted all healthcare providers, who are currently keeping patients in our open label extension studies and expanded access program within the first few weeks following the FDA approval. We are now continuing our promotional focus to the approximately 450 physicians who care about 80% of the treated Dravet Syndrome patients in the United States. The availability of the approved label has also allowed us to advance our FINTEPLA coverage discussions with private payers, from Medicaid administrators. Prior to the approval, we had the opportunity to meet with substantial number of payers. We educate them on the potential benefits of and key safety information for FINTEPLA, but discussions on coverage decisions could happen only after the FDA approval.\n We are very happy to report that we have already started receiving several positive coverage determinations, recognizing that some coverage determinations can take time during this initial launch period, Zogenix Central will continue to assist on individual cases in an effort to expedite the coverage.\n In summary, we are off to a very exciting start and we are very proud to bring this potentially transformative therapy to Dravet patients and their families in the US and this becomes an important option to reduce the number of devastating seizures these patients typically experience. I want to thank Dravet community for their ongoing support and thank the healthcare providers who have already become certified FINTEPLA prescribers. Reiterating what Steve said, I would also like to congratulate the entire Zogenix team who have worked tirelessly to launch FINTEPLA within just a few weeks of receiving the FDA approval and during the ongoing COVID-19 pandemic.\n Now, I will turn the call back to Steve. Steve?\n Thank you, Ashish, for a great summary. In parallel to the US activities as Ashish has described, we continue to work with regulatory authorities to advance FINTEPLA and Dravet syndrome in other key regions. In Europe, the EMA's review of our marketing application is ongoing. Based on recent and encouraging progress, we anticipate CHMPs providing their opinion by the end of this year. In anticipation of a positive opinion, we are preparing for the potential launch of FINTEPLA in our first European country, Germany, in the first quarter of 2021. Additionally in Japan, we expect to have topline data from our Phase III pivotal trial in the fourth quarter of this year to support a planned JNDA submission in the first half of 2021.\n Now I'd like to turn to our program for FINTEPLA in Lennox-Gastaut Syndrome or LGS. LGS is another rare and severe form of childhood-onset epilepsy. Unlike Dravet Syndrome, which is strongly correlated to variations in a specific gene, LGS can arise from multiple different causes, making seizures associated with LGS among the most difficult to effectively treat. A meeting with FDA has been scheduled for September, during which we will seek the agency's feedback on the non-clinical and clinical requirements to support our planned supplemental NDA or sNDA for FINTEPLA in LGS. As previously communicated, we have successfully completed a pivotal safety and efficacy Phase III trial, while are currently conducting special population Phase I pharmacokinetic trials and a two-year carcinogenicity study in rodents. Assuming data from these studies are required, we anticipate submitting an sNDA for FINTEPLA in LGS during the second quarter of 2021. As a reminder, the FDA has determined that based on an approval for FINTEPLA in Dravet syndrome, only one positive Phase III trial is required for LGS sNDA.\n Now I'd like to switch to MT1621, our investigational therapy for the treatment of a devastating and frequently fatal mitochondrial DNA depletion disorder, called Thymidine Kinase 2 deficiency, or TK2d. MT1621 is an oral, fixed dose combination treatment of deoxycytidine and deoxythymidine that serves as substrate enhancement therapy to restore mitochondrial DNA and treat the progressive deficits in motor, respiratory and feeding functions that characterize this devastating disease. MT1621 has breakthrough therapy designation in the United States and PRIME designation in Europe, as well as orphan designation in both regions.\n During the second quarter, we let twice for the FDA to discuss the development path for support of planned NDA submission for MT1621. We are very pleased with the outcome from these discussions, which supports our proposal that the survival benefit of treated patients as compared to an external historical control group is a reasonable basis for the NDA. As a reminder, we previously completed Study-101, a retrospective study of the combination of pyrimidine nucleosides in 38 patients with TK2d, which demonstrated a statistically significant, effective treatment on survival compared to an untreated control group of TK2 deficiency patients from the literature.\n In addition to this analysis, the FDA requested that we obtain information on any additional treated patients who did not participate in a multi-sponsored study in order to have a complete survival analysis for the NDA. Note that in addition to our completed Study-101, we intend to include our ongoing prospective open label Study-102 as part of the NDA submission. Study-102 provides continued treatment with MT1621 for patients who participated in Study-101. Unfortunately, Study-102 has been impacted by COVID-19, as some patients, particularly those from outside the US and Europe are restricted from traveling to clinical sites to complete study assessments. However, patients have been able to continue uninterrupted treatment with MT1621 during this pandemic.\n With respect to other feedback from the regulatory meetings, the FDA requested that we conduct a Phase I renal impairment pharmacokinetic study to provide dosing recommendations in the setting of impaired renal function.\n Regarding non-clinical toxicology, we recently completed a six-month toxicology study in rats. The FDA also requested a toxicology study in dogs, but was willing to accept the study of a minimum of three months' duration versus the typical nine months, should we have concerns that the longer duration study would substantially delay the NDA submission. In addition, the FDA accepted all of CMC-related plans for the future submission. Assuming relaxation of certain restrictions related to COVID-19, we anticipate that all data for an NDA will be available by the end of 2021 in order to support the submission in the first half of 2022.\n With that, let me hand over the call to Mike for his financial review. Mike?\n Thanks, Steve, and good afternoon, everyone. Today, we issued a press release announcing our business and financial results for the second quarter ended June 30, 2020, which I'll now run through.\n We recognized $1 million in revenue during the second quarter of 2020. This is a result of our exclusive distribution collaboration with Nippon Shinyaku for FINTEPLA in Dravet Syndrome and LGS in Japan, who recognized $1.1 million in revenue for the corresponding period in 2019. R&D expenses for the first quarter were $34.4 million, an increase of approximately $7 million from $27.1 million in the corresponding period of 2019. This increase is attributable to a modest increase in spending in our Study-1601 LGS Phase III study, development expenses related to our late-stage clinical candidate, MT1621, and an increase in personnel and R&D and operational costs, all partially offset by a decrease in spending in our Dravet Syndrome program, as a number of studies in that area have come to closure.\n SG&A expenses for the first quarter ended June 30, 2020 totaled $24.4 million, compared with $15.5 million for the second quarter of the prior year. The increase of approximately $9 million is primarily driven by the continued investment related to the launch of FINTEPLA for the treatment of Dravet Syndrome in the US, which began in the current quarter and for the preparation related to prospectively launching in Europe at the beginning of 2021.\n One additional important item to highlight in the quarter, we received payments from the UK government of $19.7 million tax fund and tax credit related to FINTEPLA development activities in 2017 and '18 that qualify under the UK small and medium-sized enterprises R&D tax relief scheme. This $20 million claim contributed to our quarter-end cash balance.\n Net loss for the second quarter ended June 30, 2020, was $53.3 million or $0.96 per share, and this compared to the net loss of $37.8 million or $0.89 per share in the second quarter ended June 30, 2019. We ended the second quarter with a strong balance sheet with cash, cash equivalents and marketable securities totaling $390 million. This significant cash position allowed us to invest in a robust and successful market of FINTEPLA in Dravet Syndrome in the US and Europe and simultaneously advance our key late-stage programs for FINTEPLA in LGS and MT1621 for TK2d.\n With that, I'll now turn the call over to the operator to start our Q&A session. Operator, can you please open the line for questions?\n | Zogenix Inc | (NASDAQ:ZGNX) | Aug 5, 2020 | 4:30 p.m. ET | 4 | pm | 2020-08-05 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. | Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. | [0.02569429 0.81884944 0.15545635] | negative | -0.793155 | 2020-08-07 | 23.930000 | 24.280001 | 23.450001 | 23.690001 | 1070192.0 | 23.820000 | 24.665001 | 23.799999 | 24.260000 | 1487901.0 | Pharmaceuticals | 2020-06-30 | 2020-06-30 | -0.96 | -1.017787 | 2020-06-30 | ZGNX | 0.057787 | beat | 0.330000 | increase | 0 | positive |
| 597 | ZIXI | /earnings/call-transcripts/2020/08/06/zix-zixi-q2-2020-earnings-call-transcript.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Zix</strong> <span class="ticker" data-id="206229">(<a href="https://www.fool.com/quote/nasdaq/zix-corporation/zixi/">NASDAQ:ZIXI</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 05, 2020</span>, <em id="time">5:00 p.m. ET</em></p><h2>Contents:</h2> <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul> <h2>Prepared Remarks:</h2> <br/> <p><strong>Operator</strong></p><p>Good afternoon. Welcome to Zix second-quarter 2020 earnings conference call. My name is Michelle, and I'll be your operator today. Joining us for today's presentation are the company's president and CEO, David Wagner; CFO, David Rockvam; and vice president of marketing, Geoff Bibby.</p> <p>Following their remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via link in the investor relations section of the company's website. Now, I would like to turn the call over to Geoff Bibby. Sir, please proceed.</p><p><strong>Geoff Bibby</strong> -- <em>Vice President of Marketing</em></p> <p>Thank you, operator. Good afternoon everyone, and thank you for joining our second-quarter 2020 earnings conference call. On the call today, we have our CEO, Dave Wagner; and our CFO, Dave Rockvam. After the market closed today, we issued a press release announcing our results for the second quarter ended June 30, 2020, a copy of which is available in the investor relations section of our website at www.zixcorp.com.</p> <p>Please note that during the course of this call, we will make forward-looking statements regarding the future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's important to note also that the company undertakes no obligation to update such statements. We caution you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and in this conference call.</p><p></p><div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zix Corporation</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZix%2520Corporation%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=e3c494ff-3af5-4d99-8287-f6f54cef8a8d">ten best stocks</a></strong> for investors to buy right now… and Zix Corporation wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZix%2520Corporation%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=e3c494ff-3af5-4d99-8287-f6f54cef8a8d" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div><p>The Risk Factors section of our most recent Form 10-K and 10-Q filings with the SEC provides examples of those risks. As more fully described in our quarterly report from the Form 10-Q on the quarter ended June 30, 2020, the company has been actively monitoring the COVID-19 situation and its impact on both the company and the world in which we operate. The impact of COVID-19 and the unprecedented measures to prevent its spread are affecting our business in various ways, such as causing volatility in demand for our products, changes in customer behavior including their spending and payment patterns, disruptions in the operations of our third-party suppliers and business partners and limitations on our employees' ability to work and travel. We expect the ultimate significance of the impact on our financial and operational results will be dictated by the length of time that these circumstances continue which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and the government and public actions taken in response.</p> <p>These factors also make it more challenging for management to estimate the future performance of our business, particularly over the near term. During the call, we will present both GAAP and non-GAAP financial measures. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing the company's performance.</p> <p>A reconciliation of certain GAAP to non-GAAP measures is included in today's press release which can be found on the investor relations section of our site. Now with that, I'm going to turn the call over to Dave Wagner for his opening remarks. Dave? </p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks Geoff. Good afternoon, and thank you everyone for joining us today. In the second quarter, we continued to drive profitable growth, and I'm proud to report that in these volatile times, we exceeded all of our financial objectives for the quarter. The abrupt and dramatic shift to remote work during Q2 enabled us to support our customers and partners more assertively than ever before.</p> <p>Under the strain of the global pandemic, we are becoming an even more essential component of our customers' work lives, further supporting the resiliency of our operating model and the importance of our secure cloud platform to provide comprehensive digital security and compliance solutions for businesses of all sizes. On a macro level, Zix continues to benefit from its advantageous strategic positioning, empowering our partners and customers with the technology tools and service to drive cloud adoption and digital transformation. This journey requires time, energy, resources and expertise. The pandemic has exasperated IT issues around security, compliance and productivity and has dramatically compressed the time line of our customers' digital transformation journey.</p> <p>The abrupt shift to remote work necessitated emergency triage measures. Our partners are the digital first responders, so to speak, in the face of a tsunami of demands placed on them to support remote work and ensure business continuity. As remote work matures, we expect increased focus on security and compliance, areas where our solutions can add even more value. In short, Zix's secure cloud platform empowers our customers and partners to deliver business value in the new secure modern workplace.</p> <p>I will now turn the call over to our CFO, Dave Rockvam, to provide details on our financials. After his remarks, I will return to discuss our core growth drivers and outlook. Dave?</p><p><strong>Dave Rockvam</strong> -- <em>Chief Financial Officer</em></p> <p>Thank you Dave, and good afternoon everyone. Echoing Dave's remarks, during the second quarter, we delivered on our financial guidance as well as our commitment to consistently generating profitable adjusted EBITDA growth on an absolute basis, both of which have us on strong footing as we head into the back half of the year. Now let's talk about our numbers in more detail. At the end of the second quarter, our ARR totaled $215.9 million up 11% from Q2 of last year.</p> <p>Our continued growth in ARR continues to be driven by our customers' move to the secure modern workplace which puts a heavy emphasis on cloud adoption. We are pleased that our cloud-based ARR grew 20% over Q2 of last year and now comprises 84% of total ARR. New customers in the quarter totaled 4,500, up 3% from Q2 of last year. For the second quarter, we had just over 96% net dollar retention which represents our renewals plus new sales into the installed base divided by the renewals that were available at the beginning of the quarter.</p> <p>As expected, the 96% is down from our prior run rate of just over 100% last quarter. And Dave will touch on this later on today's call. We are pleased that in this unprecedented environment, we were able to grow our ARR at a double-digit rate and maintain good retention rates with our customers which we believe demonstrates the mission-critical role that our solutions fill with our customers. Revenue for the second quarter increased 16% to $53.3 million from $45.9 million in the same quarter last year.</p> <p>The $53.3 million of revenue exceeded our guidance range for the second quarter. From a solutions perspective, I want to remind everyone that we don't manage our business by solution category and increasingly, our sales are made as bundled solutions. This means that we must use our judgment to estimate the value allocated to each solution area. This has become even more compounded with the launch of secure cloud.</p> <p>To that point, the data is no longer able to be compiled in a way that is meaningful. So that information will no longer be available. With that in mind, secure cloud is the platform of the future for Zix's partners and customers, and we think this transition from our legacy platforms to secure cloud will provide great value, not only for them, but ultimately, our shareholders as well. In Q2, with the launch of secure cloud, the majority of AppRiver customers were moved onto the platform.</p> <p>All the new customers on that side of the business came on to the new platform. On the historic ZIX side, we saw 56% of all new customers onboard on to secure cloud, and in July, that number is already up to 87%. In Q2, those new Zix secure cloud customers averaged 1.6 services per mailbox, well above the 1.1 average we currently have across the company. We think this bodes well for our strategy of providing a strong, user-friendly platform that makes it easy to add more Zix solutions, ultimately making us more valuable and stickier to our partners and customers.</p> <p>Shifting back to the P&L. Our adjusted gross profit for the quarter was $29.2 million or 54.7% of total revenue which was an improvement on a dollar basis from $27.9 million or 60.8% of total revenue in the second quarter of last year. Gross margin dollars were down very slightly from Q1 2020. This flattening was primarily the impact of customers lowering their licenses due to the furloughing or termination of employees mainly due to COVID.</p> <p>This was mainly attributable to hosted exchange and on-premise encryption customers. The revenue and ARR increase in Q2 came mainly from additional seats of Office 365 which combined for higher revenue with slightly lower gross margin dollars. Going forward, we think the launch of secure cloud and the increased emphasis we are putting on Zix intellectual property sales with our partners will help balance our gross margin dollar growth. Gross margins on a GAAP basis were down from $26.4 million in Q2 of last year to $25.1 million in Q2 of this year, mainly due to severance expenses and higher stock-based compensation in the quarter.</p> <p>Our adjusted R&D expenses for the second quarter of 2020 were $5.2 million or 9.8% of total revenue compared to $4.8 million or 10.5% of total revenue in Q2 of last year. The year-over-year dollar increase for the quarter was primarily due to certain development projects the company completed during the quarter. We expect our adjusted R&D expense to be slightly lower in Q3 due to the expense actions we took in Q2 and a little bit higher capitalization of R&D software expenses based on the nature of our Q3 projects. Our adjusted selling and marketing expenses for the quarter were $10.2 million or 19.1% of total revenue compared to $9.8 million or 21.3% of total revenue in Q2 of last year.</p> <p>This lowered percent of revenue in selling and marketing expense shows our lower cost of customer acquisition from our high-velocity sales model and the success we are having winning new customers and wallet share gains from our over 4,450 MSP partners, validating our model and go-to-market strategy as our continued low-cost to acquire customers or CAC, in the quarter which was $2,172 per customer. For the second quarter of 2020, our adjusted general and administrative expenses were $3.5 million or 6.6% of total revenue which was down from $4.5 million or 9.7% of total revenue reported in Q2 of last year. On a GAAP basis, we recorded a net loss attributable to common shareholders of a loss of $4.1 million or a loss of $0.08 per fully diluted share. The $0.08 loss for the quarter compares to a net loss attributable to common shareholders of a loss of $7.1 million or $0.13 per fully diluted share in Q2 of last year.</p> <p>Our second-quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $8 million or $0.15 per fully diluted share which was $0.01 above our guidance. This compares to $5.8 million or $0.11 per fully diluted share that we reported in Q2 of last year. And finally, our adjusted EBITDA for Q2 2020 totaled $12.7 million, an increase from $10.7 million we reported in Q2 of last year. As a percentage of total revenue, adjusted EBITDA for Q2 2020 was 23.8% compared to 23.4% in Q2 of last year.</p> <p>Cash flow from operations for the second quarter of 2020 was $4.7 million, an increase of $3 million over Q2 2019. Turning to our balance sheet. We ended the quarter with $14.1 million in cash and $17 million available for borrowing through our revolving credit facility. This year, we have repurchased approximately $2.6 million of our own shares as part of our employee equity awards program.</p> <p>This does use our cash but also helps to limit dilution. In terms of capital structure and debt metrics, we had $185.8 million of net debt on our balance sheet at the end of the quarter. The $9 million of annualized costs we took out of our business in April, coupled with our strong, predictable free cash flow generation and adjusted EBITDA outlook of $51 million to $53 million for the full-year 2020, positions us favorably against our debt obligations. Our adjusted EBITDA guidance of $51 million to $53 million implies a leverage ratio of approximately 2.9 at the end of Q4, putting us well below our maximum permitted leverage ratio of 4.75 for year-end 2020.</p> <p>Capex and other intangibles for the second quarter of 2020 were $4.3 million which consisted primarily of normal business purchases and capitalized internal-use software development. We expect capex and other intangibles to be approximately $13 million to $15 million for the full-year 2020 net of cap software amortization. We also expect adjusted depreciation and amortization to be approximately $10 million for the full-year 2020. Our backlog at June 30, 2020, was $85 million which was a decrease of 7% from $91.4 million at the end of Q2 of last year.</p> <p>As we mentioned previously, backlog is not a strong metric of which to judge our progress as our customers are moving more and more to a monthly model which in turn delivers a lower backlog. We prefer to look at billings as a better metric for the health and growth of our business. For the second quarter of 2020, total gross billings were up 13% to $52.1 million from $46.3 million in Q2 last year. Now turning to our financial guidance for the third-quarter 2020 which is based on current market conditions and expectations.</p> <p>In Q3, we currently expect revenue to range between $53.5 million and $54 million which implies a 12% to 13% growth rate compared to the same year-ago quarter. Fully diluted GAAP loss per share attributable to common stockholders is expected to be in a range of a loss of $0.02 and a loss of $0.01. We are forecasting fully diluted non-GAAP adjusted earnings per share attributable to common stockholders before deemed dividends and excluding deferred tax expense to be in the range of $0.15 and $0.16. We expect adjusted EBITDA to be approximately 24% to 25% of total revenue.</p> <p>The per share guidance figures are based on an approximate basic share count of 55.3 million for Q3 2020. Based on our current visibility, we have increased our revenue range for the full fiscal year 2020. We are currently forecasting revenue to range between $211 million and $217 million, representing an increase of between 21% and 25% compared to 2019 and 9% to 13% on an organic basis. We expect fully diluted GAAP loss per share attributable to common stockholders to range between a loss of $0.13 and a loss of $0.09 for the year.</p> <p>On a non-GAAP basis, adjusted earnings per share attributable to common stockholders is expected to be in a range between $0.58 to $0.60. Adjusted EBITDA is forecasted to be in the range of $51 million to $53 million or approximately 23% to 25% of total revenue for 2020 and a year-over-year increase of between 29% and 34% compared to fiscal year 2019. The per share figures are based on an approximate basic share count of 54.8 million for 2020. Based on our current outlook, we expect to generate continued strong free cash flow in 2020.</p> <p>We are forecasting approximately $9.5 million in interest expense on our bank credit facility which is down from earlier estimates due to lower interest rates. This completes my financial summary. For a more detailed analysis of our financial results, please refer to today's earnings release as well as our 10-Q which we plan to file by August 10. Also visit our investor relations website to view our most recent investor presentation.</p> <p>Dave?</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks Dave. I will now review our execution of strategy in the context of our three primary growth drivers. Our first growth driver is new customer acquisition. We had some noteworthy wins in the quarter on both the Zix and AppRiver sides of the business.</p> <p>First, on the direct far side, our top five wins in the quarter were in a diverse set of industries including two in healthcare, one in legal, one in construction and one in manufacturing. Two of our top five wins included archiving, and both of these wins included data migration-as-a-service which has proven to be a game changer for new customers. Our largest new customer win in Q2 was a six-figure deal in construction that included productivity, encryption and advanced threat protection. This customer is looking for a proven advanced threat solution following a malware attack they experienced in March that took their network down for a week.</p> <p>Another major win in Q2 was with a healthcare provider that was attracted to Zix because of our phenomenal customer support. We again averaged three products per new customer in our top five new customer wins. On the MSP side, we added 60 net new transacting partners in Q2 which was up from the 55 we added in Q1 and brings our total to over 4,450 at quarter end. In Q2, we added approximately 160 net new customers per week, bringing our total customer count on the legacy AppRiver side of the business to more than 73,000.</p> <p>Late in Q2, we began seeing increasing sales momentum, both on the direct and indirect side of our business and across our full suite of products. In June, we achieved a monthly record of 4,300 trials, exceeding the prior record of just under 4,200 trials established in February. The record trials were driven primarily by continuing increases in encryption, archive and advanced threat protection by our MSP partners. We also launched our new enhanced advanced threat product localized for the U.K.</p> <p>market in June which also contributed to the increased IP trial activity. IP trials in June were 28% of total trials. In terms of overall business trends across our large partner base, we've seen a substantial stabilization since the March, April time frame. If you recall from our Q2 earnings call in May, we reported that in April, we were seeing an uptick of approximately 20% in new customers, a slight increase in churn and a real drop-off in additional business from existing customers.</p> <p>As we move through Q2, both the new customer increase and the increase in churn moderated and more importantly, the business to existing customers began to recover. In total, for the second quarter, business to existing customers was off almost 50% from Q2 2019. However, by the time we hit June and now July, the net increase in business to existing customers has largely recovered to pre-COVID levels. We remain guarded in our view of the macro environment, but we are pleased with the opportunities we are seeing to help our customers and partners work remotely and digitally transform their businesses and the resulting recovery we are seeing in June and July.</p> <p>That overall backdrop is a good segue to our second growth driver which is sales to existing customers. In Q2, four of the top five add-ons through our bar and direct sales teams were in healthcare and one was in government. All five were encryption-only add-ons. Cross-selling into the base remains a focus, and we would have loved to have more success in the top accounts.</p> <p>But the fact that we're seeing strong upsell in our core encryption business is a healthy sign. The average contract term of the top five add-ons was approximately 20 months, consistent with prior periods which we also think is a healthy sign. On the MSP side, sales to existing customers accounted for only 22% of the MRR increase in the quarter. This compares to 44% in Q2 2019.</p> <p>As we previewed on our May call, we experienced a deceleration of orders from existing customers in March and April. As we hope though our flexible, consumption-based, month-to-month billing model allowed our partners and customers to recover quickly. For the month of July, 48% of our increase in MRR was from existing customers. In the existing customer base, we are also seeing a continued migration from hosted exchange to Office 365 driven by work-from-home demands that are better served in the cloud and by Microsoft's customer incentive for Teams adoption.</p> <p>We've always anticipated this migration, but COVID and work from home has accelerated it. Moving to our third growth driver, increasing retention. Our total company net dollar retention was 96% in Q2 compared to 100% in the prior quarter. This is primarily due to reduced sales to existing customers that I just reviewed.</p> <p>In addition, we lost a meaningful OEM encryption customer that was moderate in terms of ARR, but very large in terms of number of seats. Churn is up modestly in both hosted exchange and our on-premise encryption business as COVID has clearly accelerated trends toward the cloud and secure remote work. We are encouraged that for the month of July, total company net retention was back over 100%. The successful launch of secure cloud and the positive initial acceptance by our customer base makes us even more enthusiastic about our long-term growth prospects.</p> <p>Before closing, I would like to highlight an accomplishment that the Board, the leadership team and I are really proud of. Building upon our foundation of values and our focus on compliance, in the past 12 months, we have doubled down on Environmental, Societal and Governance programs or ESG. During Q2, Zix received a prime status rating and corporate ESG performance from ISS. This recognition speaks to the quality of the framework we have established for ESG best practices that guides our decision-making on a daily basis.</p> <p>We are proud of this rating that places us in the top decile of publicly traded companies with respect to ESG which we think bodes well for all of our stakeholders as we continue to grow. Looking forward, we are encouraged by our progress in Q2 and the initial positive indicators in July. The uptick we're experiencing in customer engagement and overall business development activities has ignited our team's energy and enthusiasm, providing momentum as we continue into the third quarter. However, we remain cognizant of the challenges in the macro environment.</p> <p>Some of our smaller customers are struggling, and our healthcare system is dealing with unprecedented challenges. We are excited by the opportunities we have to help these customers successfully transition to the cloud and digitally transform their businesses. Our results in Q2 and July demonstrate that we are now in a much more plainful state than we feared back in April. We are also encouraged by our strong financial foundation.</p> <p>We are generating significant free cash flow, we are reiterating our strong adjusted EBITDA outlook for the year, and we have over $30 million of cash and available credit facilities. Further, our secure cloud strategy is right on. Digital transformation is continuing to accelerate, and we are well positioned to capitalize on the remote work trends as evidenced by our continued efficient rate of new customer acquisition. Together with our partners, we provide the solutions and resources businesses need to be effective in this environment, helping them achieve a secure, modern workplace.</p> <p>We remain confident in our ability to deliver on our vision of becoming the leading provider of cloud email security, productivity and compliance for businesses of all sizes. That concludes our prepared remarks. Operator, we're ready to open the call for questions.</p> <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-54577">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-54577');\n });\n </script>\n</div>\n</div><h2>Questions & Answers:</h2><br/> <p><strong>Operator</strong></p><p>[Operator instructions] Now our first question will come from Chad Bennett of Craig-Hallum. Please proceed.</p><p><strong>Chad Bennett</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p> <p>Great. Thanks for taking my questions guys.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Hi Chad.</p><p><strong>Chad Bennett</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p> <p>Hope everybody is safe and healthy and your guys at zen. So yeah, just -- I mean, interesting qualitative and quantitative commentary on the rebound into June and then the first month of July. I guess, are you -- I mean, the net expansion, it sounds like, is now back over 100%. It seems like the adoption of secure cloud has been phenomenal to this point.</p> <p>Is it too early -- I don't want to get over our SKUs, but too early to think about whether it's existing or net new add-ons where you talked about the attach rates of 1.5 to 1. One, I think where we can actually see reacceleration, so to speak, in kind of those -- some of the metrics that we look at? Obviously, we're in a unique environment, I know, but it just seems like things are back to normal a lot quicker than anybody would have thought.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah, and thanks for those comments. We are really pleased with secure cloud. We are really pleased with the recovery as we had talked about in April, the monthly nature of our billing had things draw down relatively quickly, and then they have rebounded quickly. And that's exactly what we're seeing.</p> <p>That trial activity that we've talked about, the June records, that's really being driven by the advanced threat solution, the archive and the encryption. So we're leaning in, we're seeing really good new customer adoption, the new channel partners out of net 60 up from that 55. So our trends are good. The environment is not great, but our trends are good, and the team is really digging into drive those attach metrics, Chad.</p><p><strong>Chad Bennett</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p> <p>And then maybe one follow-up, just on your commentary on the churn you saw in the quarter. I think you talked about kind of on-prem encryption churn and then maybe kind of the exchange-hosted churn. I guess, can you give any type of insight again maybe it's a mute point because we're back to normal, but kind of the percentage of the business today that that represents or kind of what the risk is there?</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>OK, great. I'll let Dave give the numbers. But the really good news is we're positioned well on the cloud side. So our -- even though the net churn was down from 100% to 96%, the customer and revenue churn was tens of basis points, not hundreds, changed in the quarter.</p> <p>And so what we're seeing is customers are staying with us, but they're shifting technology platforms from those on-prem environments to the cloud environment. In the case of the encryption rotation, it's kind of a price margin-neutral equation in the terms of the Hex to Office 365, the price is relatively constant, but the margins get impacted. So those are trends that we've been aware of in the business. What happened with COVID is IT people don't want to go in and mess with servers.</p> <p>And so they're really looking to us to take that -- us and our partners to take that out of the equation and move fully to the cloud. So that's the rotation that we're capitalizing on.</p><p><strong>Dave Rockvam</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. And what -- the numbers kind of look like we said 84% of our business is coming from cloud-based businesses now. So if you look at -- that would mean the other key part of that would be our total defense product line which is our consumer base which is $7.5 million to $8 million. So you get outside of that, there's probably 15% to 20% that we need to rotate through from either on-prem or hosted exchange to our cloud.</p> <p>And not all -- those won't be losses, right? Those will be lots of opportunities for us to move them under our cloud. So over time, we think we can move well over 50% of those to our cloud, if not more, with the secure cloud launch.</p><p><strong>Chad Bennett</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p> <p>Sounds like the risk fairly low and you're in the majority of the way through anyway. So OK, guys. Thanks. Nice job executing in a tough environment.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks Chad.</p><p><strong>Dave Rockvam</strong> -- <em>Chief Financial Officer</em></p> <p>Thanks Chad.</p><p><strong>Operator</strong></p><p>Our next question will come from Andrew King of Colliers Security. Please proceed.</p><p><strong>Andrew King</strong> -- <em>Colliers Security -- Analyst</em></p> <p>Hey guys. Thanks for taking my question. So looking at the customers being on board to secure cloud versus legacy, can you give us a little bit of an idea of why that 42% is choosing legacy versus secure cloud? And is it more of the feature functionality or what's going on there?</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. To -- a lot of that has to do with the timing, Andrews, so our secure cloud launched officially in mid-April. So there were customer sales cycles in place in the second quarter where we weren't able to bring all of the new customers on secure cloud. Dave shared the July number just to show the momentum that we're getting as the sales cycles are transitioned over and then we'll expect for the long time to still bring some customers into our dedicated zones, particularly large customers.</p> <p>Some of them want to keep their mail flow in a very dedicated way. But the very vast majority of our customers, as Dave indicated, are coming directly on secure cloud now.</p><p><strong>Dave Rockvam</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. And if you pulled it back even a little bit further, yes, exactly what Dave said, it was timing a lot in that part. And even in that 87%, we're allowing for -- we have tiny, tiny Zix male type of customers that come on that aren't going to be a secure cloud-type customer that get caught up in those numbers. So we're more in the -- if you were to take some of those small ones out, you get up into the 90s pretty quickly.</p> <p>And then as we continue to build the feature functionality on the core products on the secure cloud and get full feature parity there, we'll get into the high 90s across. And it'll just be, as Dave said, a few of those, maybe older customers that are staying on on-prem or customers that come on to us on-prem for some reason that may not go on to secure cloud. So we expect that number to continue to climb and be a pretty high percent by the end of the year.</p><p><strong>Andrew King</strong> -- <em>Colliers Security -- Analyst</em></p> <p>Great. And then could you dive in a little bit on to the impact of COVID on the conversion on the trials?</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. Really in terms of conversions, we continue to perform right at the prior conversion rates, the Zix IP continues to improve as more and more of the partners are exposed to the Zix IP, that continues to converge. So the trial conversions are real strong. Again, that March, April and into May was tough.</p> <p>And then June and July, we've seen the trial activity obviously picking up through the record that we talked about in the month of June.</p><p><strong>Andrew King</strong> -- <em>Colliers Security -- Analyst</em></p> <p>Great. Thank you.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks Andrew.</p><p><strong>Operator</strong></p><p>Our next question will come from Nehal Chokshi of Northland Capital. Your line is open.</p><p><strong>Nehal Chokshi</strong> -- <em>Northland Capital -- Analyst</em></p> <p>Yes, thank you. Nice to the results come in above guidance and the tightening of range a little bit to the higher end. So that's great. So I want to stick on to the 96% -- net dollar expansion to 96% and as some of you guys mentioned, it's somewhat mute given that it's gone back up, but I still want to double-click here.</p> <p>You did mention another factor we was the loss of a large OEM customer. Can you give a little more details about that OEM customer? And why was that lost? And how much of an impact did it play in that downtick?</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah, so it was -- because it was through an OEM, the price per user was very low. So it was not a -- it was below six figures I guess ARR account, but had quite a number of users on it. It was through an OEM and that -- when we implement product or we sell products, our implementation rate is 99.98%. We always get it implemented.</p> <p>One of our OEM partners was not nearly that good about getting implementations done. And so -- and we were the OEM. We weren't the person to -- outfront making that happen. So it was a three-year renewal that didn't get renewed with our OEM partner.</p><p><strong>Nehal Chokshi</strong> -- <em>Northland Capital -- Analyst</em></p> <p>OK. Great. And what do you think is driving this net increase to existing customers recovering to pre-COVID levels? That seems a bit odd given that the macro remains pretty tough.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. I think we're -- two things. On the decline, because we're rebilling and because we're around email box, even though we have lots of small business customers. These are knowledge workers, not hospitality and healthcare worker.</p> <p>And so where we had is a contraction, we didn't lose customers, we lost users at the customer. And that then allowed us to recover more quickly. And then we're seeing the work -- remote work, even smaller businesses are all getting set to be worked from home. And so we're bringing on our MSP partners, especially are bringing on new accounts because we offer the Office 365 and secure modern workplaces that they need to be effective.</p> <p>So it is not easy out there. But we think we're in the right position. And clearly, the June, July rebound, we feel good about.</p><p><strong>Nehal Chokshi</strong> -- <em>Northland Capital -- Analyst</em></p> <p>OK, great. Thank you very much.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Thank you Nehal.</p><p><strong>Operator</strong></p><p>[Operator instructions] Our next question will come from Daniel Ives of Wedbush. Please proceed.</p><p><strong>Daniel Ives</strong> -- <em>Wedbush Securities -- Analyst</em></p> <p>Thanks and I hope everyone is well. So maybe just follow-up on the other question. In terms of June, July and just trajectory, is there anything different that you guys are doing from marketing campaigns, attacking the customer and -- or it's just a natural rebound in terms of what you believe as you've seen the last few months?</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>I think it's a natural rebound from where we're positioned. I would like to give credit to the sales leadership and the sales team. They've really gotten focused or -- and especially since COVID, they've just really gotten focused and are executing well. Trial activity is a part of how they're measured and paid, and they've really focused and done a nice job with them.</p> <p>And I think it also goes to secure cloud and actually give the product team lots of credit too. We launched that secure cloud product. We spent all year working on it, and we're delivering what the partners asked us to deliver. And so the enhancements to the advanced threat product are really causing the uptick, the localization in Europe causing an uptick as we continue to follow-on delivery throughout the summer, we've really introduced a lot of value for our -- especially for our MSP partners.</p> <p>At this point, we expect to continue to capitalize that as we head in -- through the summer and into the fall.</p><p><strong>Daniel Ives</strong> -- <em>Wedbush Securities -- Analyst</em></p> <p>OK, great. Now in terms of the cost structure obviously there's just lower T&E and interest in a number of things, just given the environment, how are you thinking about that going forward in terms of maybe things that are temporary versus more longer term sustainable?</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Yes. So you remember that we made a meaningful expense reduction at or around our last earnings call, and we think that was the right size for the right time and that's showing through in the bottom line and driving the profitable growth. We're just really pleased by the effectiveness of the remote work. We'll be continuing to look at little things down the road, office leases as they come up.</p> <p>I don't think travel will spring back, but when it's safe and if -- we won't do it until it's safe, but when it's safe, partner conferences are a really good way to engage with new prospects. We'll be out there when it's time, but we don't see that time being this calendar year.</p><p><strong>Daniel Ives</strong> -- <em>Wedbush Securities -- Analyst</em></p> <p>Great. Thanks.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks Dan.</p><p><strong>Operator</strong></p><p>At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to management for closing remarks.</p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p> <p>Well, thank you all for your time and attention on our Q2 earnings call, and we look forward to speaking with you again in 90 days.</p><p><strong>Operator</strong></p><p>[Operator signoff]</p> <p><strong>Duration: 42 minutes</strong></p><h2>Call participants:</h2><p><strong>Geoff Bibby</strong> -- <em>Vice President of Marketing</em></p><p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p><p><strong>Dave Rockvam</strong> -- <em>Chief Financial Officer</em></p><p><strong>Chad Bennett</strong> -- <em>Craig-Hallum Capital Group -- Analyst</em></p><p><strong>Andrew King</strong> -- <em>Colliers Security -- Analyst</em></p><p><strong>Nehal Chokshi</strong> -- <em>Northland Capital -- Analyst</em></p><p><strong>Daniel Ives</strong> -- <em>Wedbush Securities -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/zixi">More ZIXI analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-90112", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZIXI"], "primary_tickers_companies": ["Zix Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zix (ZIXI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 11, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-90112"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-90112", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZIXI"], "primary_tickers_companies": ["Zix Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zix (ZIXI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 11, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ZIXI earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Zix</strong> <span class="ticker" data-id="206229">(<a href="https://www.fool.com/quote/nasdaq/zix-corporation/zixi/">NASDAQ:ZIXI</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 05, 2020</span>, <em id="time">5:00 p.m. ET</em></p>, <h2>Contents:</h2>, , <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul>, , <h2>Prepared Remarks:</h2>, , <br/>, , <p><strong>Operator</strong></p>, <p>Good afternoon. Welcome to Zix second-quarter 2020 earnings conference call. My name is Michelle, and I'll be your operator today. Joining us for today's presentation are the company's president and CEO, David Wagner; CFO, David Rockvam; and vice president of marketing, Geoff Bibby.</p>, , <p>Following their remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via link in the investor relations section of the company's website. Now, I would like to turn the call over to Geoff Bibby. Sir, please proceed.</p>, <p><strong>Geoff Bibby</strong> -- <em>Vice President of Marketing</em></p>, , <p>Thank you, operator. Good afternoon everyone, and thank you for joining our second-quarter 2020 earnings conference call. On the call today, we have our CEO, Dave Wagner; and our CFO, Dave Rockvam. After the market closed today, we issued a press release announcing our results for the second quarter ended June 30, 2020, a copy of which is available in the investor relations section of our website at www.zixcorp.com.</p>, , <p>Please note that during the course of this call, we will make forward-looking statements regarding the future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's important to note also that the company undertakes no obligation to update such statements. We caution you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and in this conference call.</p>, <p></p>, <div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zix Corporation</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZix%2520Corporation%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=e3c494ff-3af5-4d99-8287-f6f54cef8a8d">ten best stocks</a></strong> for investors to buy right now… and Zix Corporation wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZix%2520Corporation%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=e3c494ff-3af5-4d99-8287-f6f54cef8a8d" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>, <p>The Risk Factors section of our most recent Form 10-K and 10-Q filings with the SEC provides examples of those risks. As more fully described in our quarterly report from the Form 10-Q on the quarter ended June 30, 2020, the company has been actively monitoring the COVID-19 situation and its impact on both the company and the world in which we operate. The impact of COVID-19 and the unprecedented measures to prevent its spread are affecting our business in various ways, such as causing volatility in demand for our products, changes in customer behavior including their spending and payment patterns, disruptions in the operations of our third-party suppliers and business partners and limitations on our employees' ability to work and travel. We expect the ultimate significance of the impact on our financial and operational results will be dictated by the length of time that these circumstances continue which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and the government and public actions taken in response.</p>, , <p>These factors also make it more challenging for management to estimate the future performance of our business, particularly over the near term. During the call, we will present both GAAP and non-GAAP financial measures. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing the company's performance.</p>, , <p>A reconciliation of certain GAAP to non-GAAP measures is included in today's press release which can be found on the investor relations section of our site. Now with that, I'm going to turn the call over to Dave Wagner for his opening remarks. Dave? </p>, <p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p>, , <p>Thanks Geoff. Good afternoon, and thank you everyone for joining us today. In the second quarter, we continued to drive profitable growth, and I'm proud to report that in these volatile times, we exceeded all of our financial objectives for the quarter. The abrupt and dramatic shift to remote work during Q2 enabled us to support our customers and partners more assertively than ever before.</p>, , <p>Under the strain of the global pandemic, we are becoming an even more essential component of our customers' work lives, further supporting the resiliency of our operating model and the importance of our secure cloud platform to provide comprehensive digital security and compliance solutions for businesses of all sizes. On a macro level, Zix continues to benefit from its advantageous strategic positioning, empowering our partners and customers with the technology tools and service to drive cloud adoption and digital transformation. This journey requires time, energy, resources and expertise. The pandemic has exasperated IT issues around security, compliance and productivity and has dramatically compressed the time line of our customers' digital transformation journey.</p>, , <p>The abrupt shift to remote work necessitated emergency triage measures. Our partners are the digital first responders, so to speak, in the face of a tsunami of demands placed on them to support remote work and ensure business continuity. As remote work matures, we expect increased focus on security and compliance, areas where our solutions can add even more value. In short, Zix's secure cloud platform empowers our customers and partners to deliver business value in the new secure modern workplace.</p>, , <p>I will now turn the call over to our CFO, Dave Rockvam, to provide details on our financials. After his remarks, I will return to discuss our core growth drivers and outlook. Dave?</p>, <p><strong>Dave Rockvam</strong> -- <em>Chief Financial Officer</em></p>, , <p>Thank you Dave, and good afternoon everyone. Echoing Dave's remarks, during the second quarter, we delivered on our financial guidance as well as our commitment to consistently generating profitable adjusted EBITDA growth on an absolute basis, both of which have us on strong footing as we head into the back half of the year. Now let's talk about our numbers in more detail. At the end of the second quarter, our ARR totaled $215.9 million up 11% from Q2 of last year.</p>, , <p>Our continued growth in ARR continues to be driven by our customers' move to the secure modern workplace which puts a heavy emphasis on cloud adoption. We are pleased that our cloud-based ARR grew 20% over Q2 of last year and now comprises 84% of total ARR. New customers in the quarter totaled 4,500, up 3% from Q2 of last year. For the second quarter, we had just over 96% net dollar retention which represents our renewals plus new sales into the installed base divided by the renewals that were available at the beginning of the quarter.</p>, , <p>As expected, the 96% is down from our prior run rate of just over 100% last quarter. And Dave will touch on this later on today's call. We are pleased that in this unprecedented environment, we were able to grow our ARR at a double-digit rate and maintain good retention rates with our customers which we believe demonstrates the mission-critical role that our solutions fill with our customers. Revenue for the second quarter increased 16% to $53.3 million from $45.9 million in the same quarter last year.</p>, , <p>The $53.3 million of revenue exceeded our guidance range for the second quarter. From a solutions perspective, I want to remind everyone that we don't manage our business by solution category and increasingly, our sales are made as bundled solutions. This means that we must use our judgment to estimate the value allocated to each solution area. This has become even more compounded with the launch of secure cloud.</p>, , <p>To that point, the data is no longer able to be compiled in a way that is meaningful. So that information will no longer be available. With that in mind, secure cloud is the platform of the future for Zix's partners and customers, and we think this transition from our legacy platforms to secure cloud will provide great value, not only for them, but ultimately, our shareholders as well. In Q2, with the launch of secure cloud, the majority of AppRiver customers were moved onto the platform.</p>, , <p>All the new customers on that side of the business came on to the new platform. On the historic ZIX side, we saw 56% of all new customers onboard on to secure cloud, and in July, that number is already up to 87%. In Q2, those new Zix secure cloud customers averaged 1.6 services per mailbox, well above the 1.1 average we currently have across the company. We think this bodes well for our strategy of providing a strong, user-friendly platform that makes it easy to add more Zix solutions, ultimately making us more valuable and stickier to our partners and customers.</p>, , <p>Shifting back to the P&L. Our adjusted gross profit for the quarter was $29.2 million or 54.7% of total revenue which was an improvement on a dollar basis from $27.9 million or 60.8% of total revenue in the second quarter of last year. Gross margin dollars were down very slightly from Q1 2020. This flattening was primarily the impact of customers lowering their licenses due to the furloughing or termination of employees mainly due to COVID.</p>, , <p>This was mainly attributable to hosted exchange and on-premise encryption customers. The revenue and ARR increase in Q2 came mainly from additional seats of Office 365 which combined for higher revenue with slightly lower gross margin dollars. Going forward, we think the launch of secure cloud and the increased emphasis we are putting on Zix intellectual property sales with our partners will help balance our gross margin dollar growth. Gross margins on a GAAP basis were down from $26.4 million in Q2 of last year to $25.1 million in Q2 of this year, mainly due to severance expenses and higher stock-based compensation in the quarter.</p>, , <p>Our adjusted R&D expenses for the second quarter of 2020 were $5.2 million or 9.8% of total revenue compared to $4.8 million or 10.5% of total revenue in Q2 of last year. The year-over-year dollar increase for the quarter was primarily due to certain development projects the company completed during the quarter. We expect our adjusted R&D expense to be slightly lower in Q3 due to the expense actions we took in Q2 and a little bit higher capitalization of R&D software expenses based on the nature of our Q3 projects. Our adjusted selling and marketing expenses for the quarter were $10.2 million or 19.1% of total revenue compared to $9.8 million or 21.3% of total revenue in Q2 of last year.</p>, , <p>This lowered percent of revenue in selling and marketing expense shows our lower cost of customer acquisition from our high-velocity sales model and the success we are having winning new customers and wallet share gains from our over 4,450 MSP partners, validating our model and go-to-market strategy as our continued low-cost to acquire customers or CAC, in the quarter which was $2,172 per customer. For the second quarter of 2020, our adjusted general and administrative expenses were $3.5 million or 6.6% of total revenue which was down from $4.5 million or 9.7% of total revenue reported in Q2 of last year. On a GAAP basis, we recorded a net loss attributable to common shareholders of a loss of $4.1 million or a loss of $0.08 per fully diluted share. The $0.08 loss for the quarter compares to a net loss attributable to common shareholders of a loss of $7.1 million or $0.13 per fully diluted share in Q2 of last year.</p>, , <p>Our second-quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $8 million or $0.15 per fully diluted share which was $0.01 above our guidance. This compares to $5.8 million or $0.11 per fully diluted share that we reported in Q2 of last year. And finally, our adjusted EBITDA for Q2 2020 totaled $12.7 million, an increase from $10.7 million we reported in Q2 of last year. As a percentage of total revenue, adjusted EBITDA for Q2 2020 was 23.8% compared to 23.4% in Q2 of last year.</p>, , <p>Cash flow from operations for the second quarter of 2020 was $4.7 million, an increase of $3 million over Q2 2019. Turning to our balance sheet. We ended the quarter with $14.1 million in cash and $17 million available for borrowing through our revolving credit facility. This year, we have repurchased approximately $2.6 million of our own shares as part of our employee equity awards program.</p>, , <p>This does use our cash but also helps to limit dilution. In terms of capital structure and debt metrics, we had $185.8 million of net debt on our balance sheet at the end of the quarter. The $9 million of annualized costs we took out of our business in April, coupled with our strong, predictable free cash flow generation and adjusted EBITDA outlook of $51 million to $53 million for the full-year 2020, positions us favorably against our debt obligations. Our adjusted EBITDA guidance of $51 million to $53 million implies a leverage ratio of approximately 2.9 at the end of Q4, putting us well below our maximum permitted leverage ratio of 4.75 for year-end 2020.</p>, , <p>Capex and other intangibles for the second quarter of 2020 were $4.3 million which consisted primarily of normal business purchases and capitalized internal-use software development. We expect capex and other intangibles to be approximately $13 million to $15 million for the full-year 2020 net of cap software amortization. We also expect adjusted depreciation and amortization to be approximately $10 million for the full-year 2020. Our backlog at June 30, 2020, was $85 million which was a decrease of 7% from $91.4 million at the end of Q2 of last year.</p>, , <p>As we mentioned previously, backlog is not a strong metric of which to judge our progress as our customers are moving more and more to a monthly model which in turn delivers a lower backlog. We prefer to look at billings as a better metric for the health and growth of our business. For the second quarter of 2020, total gross billings were up 13% to $52.1 million from $46.3 million in Q2 last year. Now turning to our financial guidance for the third-quarter 2020 which is based on current market conditions and expectations.</p>, , <p>In Q3, we currently expect revenue to range between $53.5 million and $54 million which implies a 12% to 13% growth rate compared to the same year-ago quarter. Fully diluted GAAP loss per share attributable to common stockholders is expected to be in a range of a loss of $0.02 and a loss of $0.01. We are forecasting fully diluted non-GAAP adjusted earnings per share attributable to common stockholders before deemed dividends and excluding deferred tax expense to be in the range of $0.15 and $0.16. We expect adjusted EBITDA to be approximately 24% to 25% of total revenue.</p>, , <p>The per share guidance figures are based on an approximate basic share count of 55.3 million for Q3 2020. Based on our current visibility, we have increased our revenue range for the full fiscal year 2020. We are currently forecasting revenue to range between $211 million and $217 million, representing an increase of between 21% and 25% compared to 2019 and 9% to 13% on an organic basis. We expect fully diluted GAAP loss per share attributable to common stockholders to range between a loss of $0.13 and a loss of $0.09 for the year.</p>, , <p>On a non-GAAP basis, adjusted earnings per share attributable to common stockholders is expected to be in a range between $0.58 to $0.60. Adjusted EBITDA is forecasted to be in the range of $51 million to $53 million or approximately 23% to 25% of total revenue for 2020 and a year-over-year increase of between 29% and 34% compared to fiscal year 2019. The per share figures are based on an approximate basic share count of 54.8 million for 2020. Based on our current outlook, we expect to generate continued strong free cash flow in 2020.</p>, , <p>We are forecasting approximately $9.5 million in interest expense on our bank credit facility which is down from earlier estimates due to lower interest rates. This completes my financial summary. For a more detailed analysis of our financial results, please refer to today's earnings release as well as our 10-Q which we plan to file by August 10. Also visit our investor relations website to view our most recent investor presentation.</p>, , <p>Dave?</p>, <p><strong>Dave Wagner</strong> -- <em>Chief Executive Officer</em></p>, , <p>Thanks Dave. I will now review our execution of strategy in the context of our three primary growth drivers. Our first growth driver is new customer acquisition. We had some noteworthy wins in the quarter on both the Zix and AppRiver sides of the business.</p>, , <p>First, on the direct far side, our top five wins in the quarter were in a diverse set of industries including two in healthcare, one in legal, one in construction and one in manufacturing. Two of our top five wins included archiving, and both of these wins included data migration-as-a-service which has proven to be a game changer for new customers. Our largest new customer win in Q2 was a six-figure deal in construction that included productivity, encryption and advanced threat protection. This customer is looking for a proven advanced threat solution following a malware attack they experienced in March that took their network down for a week.</p>, , <p>Another major win in Q2 was with a healthcare provider that was attracted to Zix because of our phenomenal customer support. We again averaged three products per new customer in our top five new customer wins. On the MSP side, we added 60 net new transacting partners in Q2 which was up from the 55 we added in Q1 and brings our total to over 4,450 at quarter end. In Q2, we added approximately 160 net new customers per week, bringing our total customer count on the legacy AppRiver side of the business to more than 73,000.</p>, , <p>Late in Q2, we began seeing increasing sales momentum, both on the direct and indirect side of our business and across our full suite of products. In June, we achieved a monthly record of 4,300 trials, exceeding the prior record of just under 4,200 trials established in February. The record trials were driven primarily by continuing increases in encryption, archive and advanced threat protection by our MSP partners. We also launched our new enhanced advanced threat product localized for the U.K.</p>, , <p>market in June which also contributed to the increased IP trial activity. IP trials in June were 28% of total trials. In terms of overall business trends across our large partner base, we've seen a substantial stabilization since the March, April time frame. If you recall from our Q2 earnings call in May, we reported that in April, we were seeing an uptick of approximately 20% in new customers, a slight increase in churn and a real drop-off in additional business from existing customers.</p>, , <p>As we move through Q2, both the new customer increase and the increase in churn moderated and more importantly, the business to existing customers began to recover. In total, for the second quarter, business to existing customers was off almost 50% from Q2 2019. However, by the time we hit June and now July, the net increase in business to existing customers has largely recovered to pre-COVID levels. We remain guarded in our view of the macro environment, but we are pleased with the opportunities we are seeing to help our customers and partners work remotely and digitally transform their businesses and the resulting recovery we are seeing in June and July.</p>, , <p>That overall backdrop is a good segue to our second growth driver which is sales to existing customers. In Q2, four of the top five add-ons through our bar and direct sales teams were in healthcare and one was in government. All five were encryption-only add-ons. Cross-selling into the base remains a focus, and we would have loved to have more success in the top accounts.</p>, , <p>But the fact that we're seeing strong upsell in our core encryption business is a healthy sign. The average contract term of the top five add-ons was approximately 20 months, consistent with prior periods which we also think is a healthy sign. On the MSP side, sales to existing customers accounted for only 22% of the MRR increase in the quarter. This compares to 44% in Q2 2019.</p>, , <p>As we previewed on our May call, we experienced a deceleration of orders from existing customers in March and April. As we hope though our flexible, consumption-based, month-to-month billing model allowed our partners and customers to recover quickly. For the month of July, 48% of our increase in MRR was from existing customers. In the existing customer base, we are also seeing a continued migration from hosted exchange to Office 365 driven by work-from-home demands that are better served in the cloud and by Microsoft's customer incentive for Teams adoption.</p>, , <p>We've always anticipated this migration, but COVID and work from home has accelerated it. Moving to our third growth driver, increasing retention. Our total company net dollar retention was 96% in Q2 compared to 100% in the prior quarter. This is primarily due to reduced sales to existing customers that I just reviewed.</p>, , ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-90112", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZIXI"], "primary_tickers_companies": ["Zix Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zix (ZIXI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 11, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-90112"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-90112", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZIXI"], "primary_tickers_companies": ["Zix Corporation"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zix (ZIXI) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 11, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ZIXI earnings call for the period ending June 30, 2020. | Good afternoon. Welcome to Zix second-quarter 2020 earnings conference call. My name is Michelle, and I'll be your operator today. Joining us for today's presentation are the company's president and CEO, David Wagner; CFO, David Rockvam; and vice president of marketing, Geoff Bibby.\n Following their remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via link in the investor relations section of the company's website. Now, I would like to turn the call over to Geoff Bibby. Sir, please proceed.\n Thank you, operator. Good afternoon everyone, and thank you for joining our second-quarter 2020 earnings conference call. On the call today, we have our CEO, Dave Wagner; and our CFO, Dave Rockvam. After the market closed today, we issued a press release announcing our results for the second quarter ended June 30, 2020, a copy of which is available in the investor relations section of our website at www.zixcorp.com.\n Please note that during the course of this call, we will make forward-looking statements regarding the future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's important to note also that the company undertakes no obligation to update such statements. We caution you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and in this conference call.\n The Risk Factors section of our most recent Form 10-K and 10-Q filings with the SEC provides examples of those risks. As more fully described in our quarterly report from the Form 10-Q on the quarter ended June 30, 2020, the company has been actively monitoring the COVID-19 situation and its impact on both the company and the world in which we operate. The impact of COVID-19 and the unprecedented measures to prevent its spread are affecting our business in various ways, such as causing volatility in demand for our products, changes in customer behavior including their spending and payment patterns, disruptions in the operations of our third-party suppliers and business partners and limitations on our employees' ability to work and travel. We expect the ultimate significance of the impact on our financial and operational results will be dictated by the length of time that these circumstances continue which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and the government and public actions taken in response.\n These factors also make it more challenging for management to estimate the future performance of our business, particularly over the near term. During the call, we will present both GAAP and non-GAAP financial measures. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing the company's performance.\n Thanks Geoff. Good afternoon, and thank you everyone for joining us today. In the second quarter, we continued to drive profitable growth, and I'm proud to report that in these volatile times, we exceeded all of our financial objectives for the quarter. The abrupt and dramatic shift to remote work during Q2 enabled us to support our customers and partners more assertively than ever before.\n Under the strain of the global pandemic, we are becoming an even more essential component of our customers' work lives, further supporting the resiliency of our operating model and the importance of our secure cloud platform to provide comprehensive digital security and compliance solutions for businesses of all sizes. On a macro level, Zix continues to benefit from its advantageous strategic positioning, empowering our partners and customers with the technology tools and service to drive cloud adoption and digital transformation. This journey requires time, energy, resources and expertise. The pandemic has exasperated IT issues around security, compliance and productivity and has dramatically compressed the time line of our customers' digital transformation journey.\n The abrupt shift to remote work necessitated emergency triage measures. Our partners are the digital first responders, so to speak, in the face of a tsunami of demands placed on them to support remote work and ensure business continuity. As remote work matures, we expect increased focus on security and compliance, areas where our solutions can add even more value. In short, Zix's secure cloud platform empowers our customers and partners to deliver business value in the new secure modern workplace.\n I will now turn the call over to our CFO, Dave Rockvam, to provide details on our financials. After his remarks, I will return to discuss our core growth drivers and outlook. Dave?\n Thank you Dave, and good afternoon everyone. Echoing Dave's remarks, during the second quarter, we delivered on our financial guidance as well as our commitment to consistently generating profitable adjusted EBITDA growth on an absolute basis, both of which have us on strong footing as we head into the back half of the year. Now let's talk about our numbers in more detail. At the end of the second quarter, our ARR totaled $215.9 million up 11% from Q2 of last year.\n Our continued growth in ARR continues to be driven by our customers' move to the secure modern workplace which puts a heavy emphasis on cloud adoption. We are pleased that our cloud-based ARR grew 20% over Q2 of last year and now comprises 84% of total ARR. New customers in the quarter totaled 4,500, up 3% from Q2 of last year. For the second quarter, we had just over 96% net dollar retention which represents our renewals plus new sales into the installed base divided by the renewals that were available at the beginning of the quarter.\n As expected, the 96% is down from our prior run rate of just over 100% last quarter. And Dave will touch on this later on today's call. We are pleased that in this unprecedented environment, we were able to grow our ARR at a double-digit rate and maintain good retention rates with our customers which we believe demonstrates the mission-critical role that our solutions fill with our customers. Revenue for the second quarter increased 16% to $53.3 million from $45.9 million in the same quarter last year.\n The $53.3 million of revenue exceeded our guidance range for the second quarter. From a solutions perspective, I want to remind everyone that we don't manage our business by solution category and increasingly, our sales are made as bundled solutions. This means that we must use our judgment to estimate the value allocated to each solution area. This has become even more compounded with the launch of secure cloud.\n To that point, the data is no longer able to be compiled in a way that is meaningful. So that information will no longer be available. With that in mind, secure cloud is the platform of the future for Zix's partners and customers, and we think this transition from our legacy platforms to secure cloud will provide great value, not only for them, but ultimately, our shareholders as well. In Q2, with the launch of secure cloud, the majority of AppRiver customers were moved onto the platform.\n All the new customers on that side of the business came on to the new platform. On the historic ZIX side, we saw 56% of all new customers onboard on to secure cloud, and in July, that number is already up to 87%. In Q2, those new Zix secure cloud customers averaged 1.6 services per mailbox, well above the 1.1 average we currently have across the company. We think this bodes well for our strategy of providing a strong, user-friendly platform that makes it easy to add more Zix solutions, ultimately making us more valuable and stickier to our partners and customers.\n Shifting back to the P&L. Our adjusted gross profit for the quarter was $29.2 million or 54.7% of total revenue which was an improvement on a dollar basis from $27.9 million or 60.8% of total revenue in the second quarter of last year. Gross margin dollars were down very slightly from Q1 2020. This flattening was primarily the impact of customers lowering their licenses due to the furloughing or termination of employees mainly due to COVID.\n This was mainly attributable to hosted exchange and on-premise encryption customers. The revenue and ARR increase in Q2 came mainly from additional seats of Office 365 which combined for higher revenue with slightly lower gross margin dollars. Going forward, we think the launch of secure cloud and the increased emphasis we are putting on Zix intellectual property sales with our partners will help balance our gross margin dollar growth. Gross margins on a GAAP basis were down from $26.4 million in Q2 of last year to $25.1 million in Q2 of this year, mainly due to severance expenses and higher stock-based compensation in the quarter.\n Our adjusted R&D expenses for the second quarter of 2020 were $5.2 million or 9.8% of total revenue compared to $4.8 million or 10.5% of total revenue in Q2 of last year. The year-over-year dollar increase for the quarter was primarily due to certain development projects the company completed during the quarter. We expect our adjusted R&D expense to be slightly lower in Q3 due to the expense actions we took in Q2 and a little bit higher capitalization of R&D software expenses based on the nature of our Q3 projects. Our adjusted selling and marketing expenses for the quarter were $10.2 million or 19.1% of total revenue compared to $9.8 million or 21.3% of total revenue in Q2 of last year.\n This lowered percent of revenue in selling and marketing expense shows our lower cost of customer acquisition from our high-velocity sales model and the success we are having winning new customers and wallet share gains from our over 4,450 MSP partners, validating our model and go-to-market strategy as our continued low-cost to acquire customers or CAC, in the quarter which was $2,172 per customer. For the second quarter of 2020, our adjusted general and administrative expenses were $3.5 million or 6.6% of total revenue which was down from $4.5 million or 9.7% of total revenue reported in Q2 of last year. On a GAAP basis, we recorded a net loss attributable to common shareholders of a loss of $4.1 million or a loss of $0.08 per fully diluted share. The $0.08 loss for the quarter compares to a net loss attributable to common shareholders of a loss of $7.1 million or $0.13 per fully diluted share in Q2 of last year.\n Our second-quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $8 million or $0.15 per fully diluted share which was $0.01 above our guidance. This compares to $5.8 million or $0.11 per fully diluted share that we reported in Q2 of last year. And finally, our adjusted EBITDA for Q2 2020 totaled $12.7 million, an increase from $10.7 million we reported in Q2 of last year. As a percentage of total revenue, adjusted EBITDA for Q2 2020 was 23.8% compared to 23.4% in Q2 of last year.\n Cash flow from operations for the second quarter of 2020 was $4.7 million, an increase of $3 million over Q2 2019. Turning to our balance sheet. We ended the quarter with $14.1 million in cash and $17 million available for borrowing through our revolving credit facility. This year, we have repurchased approximately $2.6 million of our own shares as part of our employee equity awards program.\n This does use our cash but also helps to limit dilution. In terms of capital structure and debt metrics, we had $185.8 million of net debt on our balance sheet at the end of the quarter. The $9 million of annualized costs we took out of our business in April, coupled with our strong, predictable free cash flow generation and adjusted EBITDA outlook of $51 million to $53 million for the full-year 2020, positions us favorably against our debt obligations. Our adjusted EBITDA guidance of $51 million to $53 million implies a leverage ratio of approximately 2.9 at the end of Q4, putting us well below our maximum permitted leverage ratio of 4.75 for year-end 2020.\n Capex and other intangibles for the second quarter of 2020 were $4.3 million which consisted primarily of normal business purchases and capitalized internal-use software development. We expect capex and other intangibles to be approximately $13 million to $15 million for the full-year 2020 net of cap software amortization. We also expect adjusted depreciation and amortization to be approximately $10 million for the full-year 2020. Our backlog at June 30, 2020, was $85 million which was a decrease of 7% from $91.4 million at the end of Q2 of last year.\n As we mentioned previously, backlog is not a strong metric of which to judge our progress as our customers are moving more and more to a monthly model which in turn delivers a lower backlog. We prefer to look at billings as a better metric for the health and growth of our business. For the second quarter of 2020, total gross billings were up 13% to $52.1 million from $46.3 million in Q2 last year. Now turning to our financial guidance for the third-quarter 2020 which is based on current market conditions and expectations.\n In Q3, we currently expect revenue to range between $53.5 million and $54 million which implies a 12% to 13% growth rate compared to the same year-ago quarter. Fully diluted GAAP loss per share attributable to common stockholders is expected to be in a range of a loss of $0.02 and a loss of $0.01. We are forecasting fully diluted non-GAAP adjusted earnings per share attributable to common stockholders before deemed dividends and excluding deferred tax expense to be in the range of $0.15 and $0.16. We expect adjusted EBITDA to be approximately 24% to 25% of total revenue.\n The per share guidance figures are based on an approximate basic share count of 55.3 million for Q3 2020. Based on our current visibility, we have increased our revenue range for the full fiscal year 2020. We are currently forecasting revenue to range between $211 million and $217 million, representing an increase of between 21% and 25% compared to 2019 and 9% to 13% on an organic basis. We expect fully diluted GAAP loss per share attributable to common stockholders to range between a loss of $0.13 and a loss of $0.09 for the year.\n On a non-GAAP basis, adjusted earnings per share attributable to common stockholders is expected to be in a range between $0.58 to $0.60. Adjusted EBITDA is forecasted to be in the range of $51 million to $53 million or approximately 23% to 25% of total revenue for 2020 and a year-over-year increase of between 29% and 34% compared to fiscal year 2019. The per share figures are based on an approximate basic share count of 54.8 million for 2020. Based on our current outlook, we expect to generate continued strong free cash flow in 2020.\n We are forecasting approximately $9.5 million in interest expense on our bank credit facility which is down from earlier estimates due to lower interest rates. This completes my financial summary. For a more detailed analysis of our financial results, please refer to today's earnings release as well as our 10-Q which we plan to file by August 10. Also visit our investor relations website to view our most recent investor presentation.\n Dave?\n Thanks Dave. I will now review our execution of strategy in the context of our three primary growth drivers. Our first growth driver is new customer acquisition. We had some noteworthy wins in the quarter on both the Zix and AppRiver sides of the business.\n First, on the direct far side, our top five wins in the quarter were in a diverse set of industries including two in healthcare, one in legal, one in construction and one in manufacturing. Two of our top five wins included archiving, and both of these wins included data migration-as-a-service which has proven to be a game changer for new customers. Our largest new customer win in Q2 was a six-figure deal in construction that included productivity, encryption and advanced threat protection. This customer is looking for a proven advanced threat solution following a malware attack they experienced in March that took their network down for a week.\n Another major win in Q2 was with a healthcare provider that was attracted to Zix because of our phenomenal customer support. We again averaged three products per new customer in our top five new customer wins. On the MSP side, we added 60 net new transacting partners in Q2 which was up from the 55 we added in Q1 and brings our total to over 4,450 at quarter end. In Q2, we added approximately 160 net new customers per week, bringing our total customer count on the legacy AppRiver side of the business to more than 73,000.\n Late in Q2, we began seeing increasing sales momentum, both on the direct and indirect side of our business and across our full suite of products. In June, we achieved a monthly record of 4,300 trials, exceeding the prior record of just under 4,200 trials established in February. The record trials were driven primarily by continuing increases in encryption, archive and advanced threat protection by our MSP partners. We also launched our new enhanced advanced threat product localized for the U.K.\n market in June which also contributed to the increased IP trial activity. IP trials in June were 28% of total trials. In terms of overall business trends across our large partner base, we've seen a substantial stabilization since the March, April time frame. If you recall from our Q2 earnings call in May, we reported that in April, we were seeing an uptick of approximately 20% in new customers, a slight increase in churn and a real drop-off in additional business from existing customers.\n As we move through Q2, both the new customer increase and the increase in churn moderated and more importantly, the business to existing customers began to recover. In total, for the second quarter, business to existing customers was off almost 50% from Q2 2019. However, by the time we hit June and now July, the net increase in business to existing customers has largely recovered to pre-COVID levels. We remain guarded in our view of the macro environment, but we are pleased with the opportunities we are seeing to help our customers and partners work remotely and digitally transform their businesses and the resulting recovery we are seeing in June and July.\n That overall backdrop is a good segue to our second growth driver which is sales to existing customers. In Q2, four of the top five add-ons through our bar and direct sales teams were in healthcare and one was in government. All five were encryption-only add-ons. Cross-selling into the base remains a focus, and we would have loved to have more success in the top accounts.\n But the fact that we're seeing strong upsell in our core encryption business is a healthy sign. The average contract term of the top five add-ons was approximately 20 months, consistent with prior periods which we also think is a healthy sign. On the MSP side, sales to existing customers accounted for only 22% of the MRR increase in the quarter. This compares to 44% in Q2 2019.\n As we previewed on our May call, we experienced a deceleration of orders from existing customers in March and April. As we hope though our flexible, consumption-based, month-to-month billing model allowed our partners and customers to recover quickly. For the month of July, 48% of our increase in MRR was from existing customers. In the existing customer base, we are also seeing a continued migration from hosted exchange to Office 365 driven by work-from-home demands that are better served in the cloud and by Microsoft's customer incentive for Teams adoption.\n We've always anticipated this migration, but COVID and work from home has accelerated it. Moving to our third growth driver, increasing retention. Our total company net dollar retention was 96% in Q2 compared to 100% in the prior quarter. This is primarily due to reduced sales to existing customers that I just reviewed.\n In addition, we lost a meaningful OEM encryption customer that was moderate in terms of ARR, but very large in terms of number of seats. Churn is up modestly in both hosted exchange and our on-premise encryption business as COVID has clearly accelerated trends toward the cloud and secure remote work. We are encouraged that for the month of July, total company net retention was back over 100%. The successful launch of secure cloud and the positive initial acceptance by our customer base makes us even more enthusiastic about our long-term growth prospects.\n Before closing, I would like to highlight an accomplishment that the Board, the leadership team and I are really proud of. Building upon our foundation of values and our focus on compliance, in the past 12 months, we have doubled down on Environmental, Societal and Governance programs or ESG. During Q2, Zix received a prime status rating and corporate ESG performance from ISS. This recognition speaks to the quality of the framework we have established for ESG best practices that guides our decision-making on a daily basis.\n We are proud of this rating that places us in the top decile of publicly traded companies with respect to ESG which we think bodes well for all of our stakeholders as we continue to grow. Looking forward, we are encouraged by our progress in Q2 and the initial positive indicators in July. The uptick we're experiencing in customer engagement and overall business development activities has ignited our team's energy and enthusiasm, providing momentum as we continue into the third quarter. However, we remain cognizant of the challenges in the macro environment.\n Some of our smaller customers are struggling, and our healthcare system is dealing with unprecedented challenges. We are excited by the opportunities we have to help these customers successfully transition to the cloud and digitally transform their businesses. Our results in Q2 and July demonstrate that we are now in a much more plainful state than we feared back in April. We are also encouraged by our strong financial foundation.\n We are generating significant free cash flow, we are reiterating our strong adjusted EBITDA outlook for the year, and we have over $30 million of cash and available credit facilities. Further, our secure cloud strategy is right on. Digital transformation is continuing to accelerate, and we are well positioned to capitalize on the remote work trends as evidenced by our continued efficient rate of new customer acquisition. Together with our partners, we provide the solutions and resources businesses need to be effective in this environment, helping them achieve a secure, modern workplace.\n We remain confident in our ability to deliver on our vision of becoming the leading provider of cloud email security, productivity and compliance for businesses of all sizes. That concludes our prepared remarks. Operator, we're ready to open the call for questions.\n | Zix | (NASDAQ:ZIXI) | Aug 05, 2020 | 5:00 p.m. ET | 5 | pm | 2020-08-05 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | Good afternoon everyone, and thank you for joining our second-quarter 2020 earnings conference call. | Good afternoon everyone, and thank you for joining our second-quarter 2020 earnings conference call. | [0.5027289 0.01754341 0.47972772] | positive | 0.485185 | 2020-08-07 | 7.100000 | 7.160000 | 5.780000 | 5.930000 | 4644325.0 | 6.000000 | 6.205000 | 5.830100 | 6.030000 | 1867793.0 | Technology | 2020-06-30 | 2020-06-30 | 0.15 | 0.140250 | 2020-06-30 | ZIXI | 0.009750 | beat | -1.070000 | decrease | 0 | positive |
| 598 | ZNGA | /earnings/call-transcripts/2020/08/06/zynga-znga-q2-2020-earnings-call-transcript.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Zynga</strong> <span class="ticker" data-id="270875">(<a href="https://www.fool.com/quote/nasdaq/zynga-inc/znga/">NASDAQ:ZNGA</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 05, 2020</span>, <em id="time">5:00 p.m. ET</em></p><h2>Contents:</h2> <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul> <h2>Prepared Remarks:</h2> <br/> <p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the Zynga second-quarter 2020 results conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today to Rebecca Lau, vice president, investor relations, and corporate finance. Thank you.</p> <p>Please go ahead.</p><p><strong>Rebecca Lau</strong> -- <em>Vice President, Investor Relations, and Corporate Finance</em></p> <p>Thanks, Dylan, and welcome, everyone, to Zynga's second-quarter 2020 earnings call. On the call with me today are Frank Gibeau, our chief executive officer; and Ger Griffin, our chief financial officer. Shortly, we will open up the call for live questions. Before we cover the safe harbor, please note that in an effort to keep our team members healthy, each member on today's call is dialed in remotely.</p> <p>We appreciate your understanding during the call and hope that everyone is also safe and well during this time. During the course of today's call, we will make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-Q, as well as elsewhere in our SEC filings for further clarification.</p><p></p><div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zynga Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZynga%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=27144d1b-81af-447c-b92d-186d37d75637">ten best stocks</a></strong> for investors to buy right now… and Zynga Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZynga%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=27144d1b-81af-447c-b92d-186d37d75637" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div><p>In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides and when filed, our 10-Q, will include reconciliations of our GAAP and non-GAAP financial measures. Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. This conference call is being webcast and will be available for audio replay on our investor relations website in a few hours.</p> <p>Now, I'll turn the call over to Frank for his opening remarks. </p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks, Rebecca. Good afternoon, everyone, and thank you for joining our call. We are living in unprecedented times and more people than ever before are turning to games for entertainment and a sense of community. With more people staying at home, we saw heightened levels of player engagement, social connection, and monetization in our portfolio.</p> <p>Increased player engagement in our live services drove our exceptional Q2 results including record revenue and bookings performances and our best operating cash flow in more than eight years. We also executed our transformational acquisition of Peak and are entering Q3 with eight forever franchises adding significant scale to our live services foundation. Our new game pipeline is also progressing well, and we expect to begin releasing new titles later this year. Today, we are raising our full-year 2020 revenue and bookings guidance, which Ger will provide more details on later in the call.</p> <p>In addition, I am pleased to announce that we have entered into an agreement to acquire Rollic, one of the fastest-growing hyper-casual game companies in 2020. With Rollic, we are meaningfully expanding our entry into hyper-casual, one of the largest and fastest-growing game categories on mobile, while adding a highly talented team and an extensive network of external developers to Zynga. Our performance to date demonstrates strong execution of our multiyear growth strategy of, A, growing our live services; B, adding new forever franchises to our portfolio; and, C, adding new platforms in markets and technology. Additionally, we continue to see opportunities to enhance each of these growth pillars through acquisitions.</p> <p>First, our strength in live services is the foundation of our multiyear growth strategy. In Q2, our live services, anchored by our forever franchises and social slots and casual cards portfolios, drove our best revenue and bookings quarter in Zynga history, with revenue up 47% year over year and bookings up 38% year over year. During the quarter, we achieved many new records as more people turn to our deeply social game experiences while sheltering in place and as players enjoyed our robust lineup of bold beats. For example, within Empires & Puzzles, Merge Magic! and Hit It Rich! Slots, we recently introduced Battle Pass features, which have been well received by players and are proving to be positive drivers of engagement and monetization.</p> <p>We are also continuing to integrate and expand popular brands within our live services, including Fast & Furious in CSR2, Rick and Morty and Merge Dragons! and a new Dragons of Westeros feature in Game of Thrones Slots Casino. All of this is fueled by our proven and scalable live services capabilities comprised of best-in-class product management, data science, user acquisition, advertising, and platform relationships. Second, our goal is to add new forever franchises to our live services portfolio. Our recent acquisition of Peak brings one of the world's best puzzle game makers to Zynga, and their two top-charting games, Toon Blast and Toy Blast.</p> <p>These two titles have captured a highly engaged global audience base with some of the industry's best player retention and currently have more than 12 million mobile DAUs and 26 million mobile MAUs. These titles expand our live services to eight forever franchises, increasing the scale and resiliency of our portfolio. We are also making good progress on our three new games in soft launch: FarmVille 3, Harry Potter: Puzzles & Spells, and Puzzle Combat. We have introduced new features to provide players with more content, quests, and ways to customize their gaming experiences and have expanded into additional soft launch territories to continue gathering player feedback.</p> <p>Our soft launch process includes careful testing and iteration of game features with the goal of delivering long-term retention. We expect to begin releasing new games later this year and anticipate these titles will steadily scale over time. Third, mobile is continuously evolving, and we are investing in new platforms, markets, and technologies to increase our total addressable market and drive further growth. Today, we announced our agreement to acquire Rollic, a developer and publisher with a portfolio of popular hyper-casual games that have collectively been downloaded more than 250 million times.</p> <p>Eight of Rollic's games have reached No. 1 or No. 2 top three downloaded games in the U.S. App Store.</p> <p>And their latest releases, Go Knots 3D and Tangle Master 3D were the top two most downloaded games in the U.S. App Store in Q2 2020. With this acquisition, we are excited to enter the hyper-casual market, one of the largest and fastest-growing mobile gaming categories. The growth of this category is fueled by advertising-driven games that are highly accessible and appeal to a broad audience globally.</p> <p>With more than 5 million mobile DAUs and 65 million mobile MAUs, we expect Rollic to meaningfully increase our audience and expand and diversify our advertising business. In addition, we are driving strong growth in international markets, with Q2 revenue and bookings up 56% and 34% year over year, respectively. And Android revenue and bookings up 61% and 43% year over year. With Toon Blast and Toy Blast, we will further increase our international business, especially in Japan.</p> <p>In terms of new platform investments, we released Bumped Out, our second title on the Snap Games platform as a part of a new multi-game partnership with Snap, as well as our first voice-based game, Word Pop, exclusively for Amazon Alexa. We also produced a two-hour live-streaming event with Amazon Twitch Prime for Words with Friends in collaboration with Garth Brooks and Tricia Yearwood that entertained more than 3 million total viewers. While our investments in these and other initiatives are in the early stages, we believe they have the potential to increase our growth over the long term. Last, we continue to see opportunities to acquire talented teams and franchises to further accelerate our growth.</p> <p>The talent base for mobile gaming is global. And the mobile platform is vast and constantly evolving with new innovations emerging every year. To date, our acquisitions have delivered strong contributions to our live services, added multiple new forever franchises to our portfolio, expanded our new game pipeline, and opened up new categories for us on mobile. Our proven integration model enables teams to maintain their unique development cultures while leveraging Zynga's highly scalable studio operations and publishing platform so we can collectively grow faster together.</p> <p>Now, I would like to turn the call over to Ger to discuss our Q2 results in further detail, as well as our outlook for 2020 and beyond.</p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p> <p>Thank you, Frank. We capped off a great first-half performance with tremendous Q2 results, delivering our best quarterly revenue and bookings in Zynga history. Strength across our live services delivered a better-than-expected top line and operating leverage. We're also happy to now have Peak in the Zynga family, having closed this transformational acquisition on July 1, bringing to Zynga an amazingly talented studio with two top-charting franchises in Toon Blast and Toy Blast.</p> <p>Given the strength in our live services, including a full half-of-the-year contribution from Peak, we are raising our full-year outlook for revenue and bookings. But first, let's discuss our Q2 results. Revenue was $452 million comprised of bookings of $518 million offset by a net increase in deferred revenue of $66 million. Revenue was $22 million ahead of our raised guidance, driven by an $18 million bookings beat and a $4 million lower-than-expected net increase in deferred revenue.</p> <p>Broad-based strength across our live services drove our top-line beat, in particular, stronger-than-expected performances from our Social Slots portfolio, Words with Friends, CSR2, Empires & Puzzles versus our raised guidance. Revenue was $145 million or 47% up year over year, driven by bookings growth of $142 million or 38% year over year and a $3 million lower net increase in deferred revenue. Our year-over-year revenue and bookings growth was driven by broad-based strength across our mobile live services, in particular, from Empires & Puzzles, Merge Dragons!, Merge Magic!, and Game of Thrones Slots Casino. User pay was the driver of our top-line growth with advertising as expected, moderately down year over year.</p> <p>The net increase in deferred revenue was $66 million and was driven primarily by bookings from Empires & Puzzles and Merge Dragons!. We ended Q2 with a deferred revenue balance of $523 million versus $358 million a year ago. Turning to our Q2 operating expenses. GAAP operating expenses were $402 million, up $161 million or 67% year over year, primarily driven by higher contingent consideration expense, marketing investments, and acquisition-related expenses versus our prior year.</p> <p>Our Small Giant Games and Gram Games acquisitions continue to perform ahead of our expectations, resulting in $149 million contingent consideration expense, up $125 million year over year and $24 million ahead of our guidance. The increase in marketing was primarily due to the year-over-year addition of Merge Magic! and the overall investments across our live services portfolio, as well as games in test markets. Year over year, GAAP operating expenses increased to 89% versus 79% of revenue primarily due to the material increase in contingent consideration expense. Non-GAAP operating expenses were $222 million, up $25 million or 13% year over year primarily due to the increase in marketing investments.</p> <p>Non-GAAP operating expenses represented 43% of bookings down from 52% of bookings in the prior year, primarily driven by our improved operating leverage in all expense lines. We reported a net loss of $150 million, $10 million better than our guidance and $94 million higher than our net loss of $56 million a year ago. The variance to guidance was driven primarily by the burden expected operating performance, partially offset by the higher contingent consideration expense. The variance to prior year was driven primarily by the higher contingent consideration and income tax expense, partially offset by our improved operating performance.</p> <p>Our adjusted EBITDA was $70 million, $35 million better than our guidance, primarily due to our higher-than-expected top-line performance and lower-than-anticipated marketing expenses. On a year-over-year basis, adjusted EBITDA increased $67 million on strong operating performance. We generated operating cash flow of $145 million, our best performance since 2011 and up 47% year over year. As of June 30, we had $1.6 billion of cash and investments.</p> <p>As of today, we have approximately $620 million in cash and investments, with the main material payments in July being the $923 million related to the acquisition of Peak and $68 million for our latest earnout payment to Gram Games. We also have $150 million available under our existing credit facility with no amounts outstanding. Looking forward, we expect positive operating cash flow through the balance of 2020 and are assessing debt financing alternatives to further expand our cash reserves, which we expect will be primarily used to fund future acquisitions to further accelerate our growth. Now, I would like to take a few moments to comment on our proposed acquisition of Rollic.</p> <p>Today, we announced an agreement to acquire Istanbul-based Rollic, a mobile games developer and publisher with an exciting portfolio of popular hyper-casual games. This acquisition gives Zynga a more meaningful presence on one of the largest and fastest-growing gaming categories on mobile and also adds a highly talented team and an extensive network of external developers. Rollic's titles currently have more than 5 million mobile DAUs and 65 million mobile MAUs, which will meaningfully increase our audience and grow our advertising business. We are initially acquiring 80% of Rollic for $168 million in cash at an implied valuation of $210 million for the total company.</p> <p>While we are not disclosing specific valuation multiples for this transaction, for full-year 2020 on a stand-alone basis, Rollic is on track to deliver just north of $100 million of revenue and bookings and margins broadly in line with those of Zynga for 2020. Over the next three years, Zynga will acquire the remaining 20% in equal installments at valuations based on specific bookings and profitability goals. The transaction is subject to customary closing adjustments, and we expect it to close on October 1, 2020. Thirdly, while we expect the acquisition of Rollic to close on October 1, our current guidance does not include any contribution from Rollic.</p> <p>Now, turning to guidance. We have developed our Q3 and full-year 2020 guidance based on the information available to us today, August 5, 2020, and using similar methodologies to prior quarters. Given the higher level of uncertainty in the industry, in particular around the COVID-19 crisis, there is the potential for a wider range of outcomes, both positive and negative, as it relates to our ultimate business results. That said, let's discuss our Q3 and 2020 guidance.</p> <p>Guidance for Q3 is as follows: revenue of $445 million, up $100 million or 29% year over year; a net increase in deferred revenue of $175 million to $50 million in the prior year; bookings of $620 million, up $225 million or 57% year over year; a net loss of $160 million versus net income of $230 million in the prior year; adjusted EBITDA loss of $45 million versus adjusted EBITDA of $28 million in the prior year. Some factors to consider in assessing our Q3 guidance include live services will drive the vast majority of our top-line performance, led by our forever franchises, including full quarter contributions from Toon Blast, Toy Blast, and Merge Magic!. This overall momentum will be partially offset by year-over-year declines in older mobile and web titles. We also expect the year-over-year user -- excuse me, we also expect that year-over-year user-pay growth will more than offset declines in advertising yields.</p> <p>With our acquisition of Peak, we have added two forever franchises, Toon Blast and Toy Blast, to our portfolio. As these are new to Zynga consistent with standard accounting practice, we expect a material net increase in deferred revenue as the majority of the initial bookings associated with these titles will be deferred for recognition as revenue in future quarters. Accordingly, in Q3, we expect a net increase in deferred revenue of $175 million. This represents the largest quarterly increase in deferred revenue in Zynga history and compares to a net increase of $50 million in Q3 2019.</p> <p>The year-over-year change in this GAAP revenue deferral is a meaningful factor in year-over-year comparability as it represents a $125 million year-over-year decrease in revenue, gross profit, net income, and adjusted EBITDA. We expect gross margins to be significantly down year over year due to the higher net increase in deferred revenue, amortization of acquired intangibles, and user-pay mix in Q3 2020 versus Q3 2019. We also anticipate our GAAP operating expenses as a percentage of revenue to increase year over year primarily due to the impact of the higher net increase in deferred revenue, partially offset by a lower contingent consideration expense year over year. Outside of these factors, we anticipate year-over-year improvements in operating leverage in R&D and G&A, partially offset by higher marketing investments across our live services portfolio and new game pipeline.</p> <p>We expect a net loss of $160 million in Q3 2020. This compares to net income of $230 million in Q3 2019, which included a one-time gain of $314 million related to the sale of our San Francisco building. Other drivers of the year-over-year change in net loss are the higher net increase in deferred revenue, amortization of acquired intangibles and stock-based compensation, partially offset by our improved operating performance and lower contingent consideration expense. We expect an adjusted EBITDA loss of $45 million in Q3 2020 versus adjusted EBITDA of $28 million in Q3 2019.</p> <p>This year-over-year change is primarily driven by the $125 million year-over-year growth in the net increase in deferred revenue, partially offset by our improved operating performance. Now, turning to 2020, our revised guidance is as follows: revenue of $1.8 billion, up $478 million or 36% year over year and up $110 million versus our prior guidance; a net increase in deferred revenue of $400 million or $158 million or 65% year over year and up $250 million versus our prior guidance; bookings of $2.2 billion, up $636 million or 41% year over year and up $360 million versus our prior guidance; a net loss of $550 million to net income of $42 million in 2019 and $200 million higher than our prior guidance of a net loss of $350 million; adjusted EBITDA of $85 million, down $2 million or 3% year over year and down $138 million versus our prior guidance. Our guidance assumes that live services will deliver the vast majority of our top-line performance, driven by our forever franchises, include full-year contributions from the recently acquired Toon Blast and Toy Blast franchises, as well as initial contributions from new games that we expect to launch later this year. We also expect year-over-year user-pay growth to more than offset declines in advertising yields.</p> <p>We expect a net increase in deferred revenue of $400 million, an increase of $250 million versus our prior guidance primarily due to the deferral of the majority of initial bookings from our recently acquired franchises, Toon Blast and Toy Blast. The year-over-year change in this GAAP deferral is a meaningful factor in year-over-year comparability as it represents a $158 million year-over-year decrease in revenue, gross profit, net income, and adjusted EBITDA. We expect gross margins to be significantly down year over year primarily due to the higher net increase in deferred revenue, additional amortization of acquired intangibles, and user-pay mix in 2020 versus 2019. Given the higher net increase in deferred revenue and contingent consideration expense in 2020 versus 2019, we expect GAAP operating expenses as a percentage of revenue to decrease year over year.</p> <p>Outside of these factors, we anticipate improvement in operating leverage from R&D and G&A, which should be partially offset by increased marketing investments in our live services and new game launches. Operating leverage will ultimately be a function of our live services performance, user pay versus advertising mix, timing of our new game launches, and the level of marketing invested in scaling our live services and new titles. In 2020, we expect a net loss of $550 million, $200 million higher than our prior guidance of $350 million primarily due to the acquisition of Peak and its resulting impact on the net increase in deferred revenue, amortization of acquired intangibles, stock-based compensation, partially offset by income tax benefits and operating contribution from the acquired titles. This compares to a net income of $42 million in 2019, which included a one-time gain of $314 million related to the sale of our San Francisco building.</p> <p>The other primary drivers of the year-over-year change in net loss are the higher net increase in deferred revenue and contingent consideration expense, with our improved operating performance offsetting the year-over-year dilutive changes in other GAAP-to-non-GAAP reconciling items. We expect adjusted EBITDA of $85 million, down $138 million versus our prior guidance as our stronger operating performance will be more than offset by the additional $250 million of net increase in deferred revenue. On a year-over-year basis, we anticipate adjusted EBITDA will be down $2 million, driven primarily by the $158 million year-over-year growth in our net increase in deferred revenue, largely offset by our improved operating performance. Our strong execution in 2020 should position Zynga for continued growth in 2021 where we expect double-digit top-line growth, the potential for further margin expansion, and positive operating cash flow.</p> <p>In summary, while we are operating in unprecedented times, we remain focused on entertaining and connecting our players through our games. Our business fundamentals are strong, and we are continuing to execute on our multiyear growth strategy. With that, I will turn the call back to Frank.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks, Ger. Before we open the call to live Q&A, I want to take a moment to touch on our current operating environment. First, we hope that all of you are safe and well along with your family, friends, and colleagues. In these challenging times, the health and safety of our teams have been a top priority.</p> <p>We're extremely proud of how Zynga has seamlessly transitioned to a work-from-home configuration without any material disruptions to our operations and while delivering new features, content, and products for our players. We anticipate that our North American offices will work from home through early 2021, while our international-based offices will begin to reopen based on guidance from local authorities. To support our teams, over the past several months, we have updated and introduced many new health and wellness benefits, programs, and services to assist with work-from-home needs. We also continued to support our communities.</p> <p>And in Q2, we donated over $2 million to a variety of causes. In addition, we are committing $25 million over the next five years toward diversity and inclusion initiatives at Zynga and in the overall gaming industry. In summary, supporting our teams, communities, and Zynga's founding mission to connect the world through games has never been more important. Our business fundamentals are strong, and we are incredibly excited by the growth and innovation ahead for interactive entertainment.</p> <p>It's increasingly clear that games are emerging as powerful new social networks where people around the world come together to connect, play, and socialize. Zynga is uniquely well-positioned within this landscape as a leading mobile-first free-to-play live services social game company with a portfolio of proven franchises. We are on track to deliver a record year for Zynga in 2020 and are positioned for further growth in 2021, where we expect double-digit growth, top-line growth, the potential for further margin expansion, and positive operating cash flow. With that, I would now like to open up the call to your questions.</p> <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-34447">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-34447');\n });\n </script>\n</div>\n</div><h2>Questions & Answers:</h2><br/> <p><strong>Operator</strong></p><p>Thank you, sir. [Operator instructions] I show our first question comes from the line of Eric Sheridan from UBS. Please go ahead.</p><p><strong>Eric Sheridan</strong> -- <em>UBS -- Analyst</em></p> <p>Thanks so much for taking the question. Hope all is well, and same is going on the team there as well. First, maybe a big picture question for you, Frank. I think you've done all the acquisitions, and I think, generally, investors have a pretty good sense of the known titles that you've acquired.</p> <p>But what sort of visibility do you have now out over multiple years? Just a sort of a big picture question in terms of thinking about what these teams might be able to develop, what a pipeline might look like. Just so investors can generally get a sense of what sort of inorganic growth might be layering in on top of some of the organic growth from the titles that they already know about. Just curious, even conceptually, how that might play out. And then maybe for the back part of the year, there continue to be a lot of changes in the broad advertising environment, investors are asking a lot of questions about the iOS 14 and IDFA.</p> <p>How are you guys thinking, both potentially for headwinds for your advertising revenue, as well as your marketing ROI in the back part of the year given some of the changes that might be playing out in the advertising landscape? Thanks so much.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks for the question, Eric. I'll take the first one. With regards to the new product pipeline. When we look across all of Zynga, including studios such as NaturalMotion, teams in the North American studios, as well as Gram, Small Giant, and now, talking about Peak, we have active products in development that are planned for 2020, 2021, and beyond.</p> <p>We're really looking at the expertise that each of those studios brings and looking at our overall portfolio in terms of where we have the best opportunities to grow the company. We also have projects planned that are smaller in scale for chat platforms, for the more mass casual platforms that are in active development and test. And we're looking for ways in the future to learn from Rollic's prototyping process. They have an amazing approach to how they prototype games, work with outside developers, and bring them to market.</p> <p>So we think that there's an opportunity there as well to further enhance and expand our product pipeline, which now encompasses chat, hyper-casual, as well as more traditional mainline mobile games. So very exciting opportunities for us in the future to continue to grow the company organically in addition to what we've done in live services and then potentially with future inorganic opportunities. In terms of the second question, if you look at the second half of the year as it relates to acquiring players and also running the advertising network, obviously, there's a lot of talk about IDFA and the impact to the overall business and also just overall trends inside the economy and what's going to happen. Obviously, a lot of unknowns there.</p> <p>And from our perspective, when we look at our business, our trends and how things are tracking, when we look into the second half, obviously, our advertising business is hitting our expectations. We communicated that we felt that it would be flat to slightly down. It's seen a little bit of a recovery here in the second half of Q2. But in terms of overall growth, I think it's really going to start to accelerate when Rollic becomes part of the advertising network in Q4 when we see a sizable increase in MAUs in addition to a diversification of the demos and also regions that we can advertise into.</p> <p>In terms of the actual specific impacts that IDFA will have on acquisition or advertising CPMs and yields, I think it's a little too early to tell what will happen there. I think there's going to be puts and takes. And I think long term, things will settle out. There'll be new opportunities and new places to innovate.</p> <p>At the same time that some traditional tools and tactics might start to lose their effectiveness. So it will be a little bit choppy here in the early stages. And as Apple rolls out some of its platform shifts, we also still have Android and other platforms that are continuing to operate in the context that we're currently comfortable with. I would point out that in the case of Rollic, for example, the way that they acquire players does not rely on IDFA.</p> <p>So we do have sectors of our business in terms of how we go out and organically acquire, and also from a paid standpoint, acquired players, that probably won't be that impacted. But there will be other parts that will be -- and we're just not sure by how much and what the mitigating countermeasures we'll take in terms of how we evolve the business from here.</p><p><strong>Eric Sheridan</strong> -- <em>UBS -- Analyst</em></p> <p>Thanks so much.</p><p><strong>Operator</strong></p><p>Thank you. I show our next question comes from the line of Alex Giaimo from Jefferies. Please go ahead.</p><p><strong>Alex Giaimo</strong> -- <em>Jefferies -- Analyst</em></p> <p>OK. Thanks, guys. Two questions, maybe one for Frank and then one for Ger. Frank, going back to Rollic, can you maybe just provide some background on the company, maybe how long you've been in discussions and what attracted you to that asset specifically.</p> <p>And then for Ger, just regarding the guidance for both the third quarter and the full year. Can you provide a bit of color on what's assumed from a Peak contribution? Should we still just be run rating that $600 million number you provided at announcement? Thanks, guys.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks, Alex. The opportunity to come together with Rollic really presented itself in the first half of this year. We have been studying hyper-casual now for several years and monitoring the progress and been very impressed with the growth rate of the category, the share of voice that it now occupies on the app stores, the number of chart positions in the top, top 10 and top 20 for installs that are maintained by hyper-casual games. So we like the category.</p> <p>As we've watched it evolved, it has changed over the last several years. But it continues to show resiliency and strength and continued growth. As a result, we started to look at ways to build versus buy to go after this opportunity. And that journey brought us to Rollic in the first part of this year.</p> <p>We were able to meet and talk to them via the meeting that you use in the pandemic, which is Zoom, but we also were able to leverage the great strength that we have in Turkey. So our Gram team, our Peak team, the Casual Cards group, those management teams were able to meet directly with Rollic really get to know each other in addition to us getting to meet them virtually over Zoom. And diligence was a very straightforward exercise. We found a team that is very aggressive, very new in terms of being founded in December 2018.</p> <p>But if you look at their track record in terms of bringing in outside developers, as well as standing up their internal studios, their results in this first part of 2020, it's really been remarkable. Aid of Rollic's games have reached one or two in terms of most downloaded. They had 250 million-plus downloads. And the growth rate just looks surprisingly strong even through some of these challenges that we see with the pandemic and economic distress.</p> <p>The category is great because they're lightweight games. They're instantly playable. They're broadly appealing. They're globally appealing.</p> <p>And it feels like that is an opportunity for us to grow our business. And with the ad model being so strong there, they have a very deep bench of advertising executives and folks that know a lot about how to monetize inside of ad-driven games that we think will help the overall portfolio at Zynga as well. So very excited to add to our footprint in Turkey. Rollic will maintain what we usually do with acquisitions.</p> <p>They've got their culture. They've got their approach. We have aligned goals. And over the next several years, we expect that we're going to be able to grow faster together.</p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p> <p>Alex, in terms of assumptions for the second half of the year, yes, I would just continue with what we said when we announced the Peak acquisition. That's the base assumption we're using for guidance.</p><p><strong>Alex Giaimo</strong> -- <em>Jefferies -- Analyst</em></p> <p>Great. Thank you both.</p><p><strong>Operator</strong></p><p>Thank you. I show our next question comes from the line of Mario Lu from Barclays. Please go ahead.</p><p><strong>Mario Lu</strong> -- <em>Barclays -- Analyst</em></p> <p>Thanks for taking the questions and congrats on the great quarter. So I have one on Peak and one on Battle Pass. So we talked a lot of opportunities and which thing that can help monetize Peak's titles, but the question is on the flip side. So how much knowledge can you leverage from Peak's expertise in the puzzle genre to your own titles, such as the upcoming Harry Potter title, as well as Peak's ability to grow its sister title Toon Blast, which mirrors the goal of Zynga sister titles such as Puzzle Combat and Merge Magic!? And secondly, on Battle Pass, I find it very interesting that the mechanic currently expands through different genres within your portfolio.</p> <p>Is there any reason why it cannot be applied to all Zynga titles over time? And any color you can provide on how additive it is to bookings for each title? Thanks.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks, Mario. In terms of the impact that Peak is having on our creative organization, it's only been a very short period of time since they've been part of our studios, but I've been really blown away by the amount of collaboration and teamwork that they've already embarked upon with our games. The Harry Potter team and the Peak team have already met multiple times. They've been trading builds and notes.</p> <p>And that the insights that Peak have developed over the years of building highly retentive games that seen at the top of the charts, is something that we're propagating through Zynga. Sidar and his leadership team have been very generous with their time to participate in design brainstorms, reviews of levels, game balancing notes. It's really been impressive to see how quickly the teams have gelled and are really helping each other. So it's only been just a matter of weeks, frankly, since they've been engaged, and we're already seeing the impact come this way, which is really one of the strengths of the model that we have by keeping the studios decentralized with their own strong cultures and chemistry, the collaboration that we see between Gram and Small Giant, NaturalMotion, Peak, and our other studios like Words with Friends and Poker, it's pretty awesome thinking about the potential long term.</p> <p>And we're already seeing it in the short-term changes and modifications to existing games. In terms of the second question. We started the Battle Pass, obviously off in Small Giant's product. We liked the results.</p> <p>It still has potential to grow, and we're still tuning it to be the best that it can be. But as I just mentioned in the prior question, we share a lot and collaborate a lot inside the company. And so all the data that the Battle Pass is generating inside Empires & Puzzles was shared with all the Zynga teams. And the important part was to take the basic value proposition that a Battle Pass has for players and express it in a category or franchise appropriate way, like with Hit It Rich! or like with the Gram title.</p> <p>So the base value proposition is very flexible, and it has a lot of room to run. You just have to make sure that you implement it in a way that makes sense inside the franchise that it's going into. And the players see the value proposition of signing up for that pass, and they really enjoy it. So we do a lot of testing.</p> <p>And I think that this will be something that can make its way into other parts of the portfolio over time. The important thing is to not rush it and stifle the engagement or the retention curves by over monetizing or putting a breakage into the game. So, Mario, we typically take a lot of time testing and implement -- before full implementation goes in, but we're very excited by the results.</p><p><strong>Mario Lu</strong> -- <em>Barclays -- Analyst</em></p> <p>That's very helpful. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from the line of Brian Fitzgerald from Wells Fargo. Please go ahead.</p><p><strong>Brian Fitzgerald</strong> -- <em>Wells Fargo Securities -- Analyst</em></p> <p>Thanks. Maybe a follow up to, I think, Alex's question and discussion on Rollic's. And that's just -- is this going to be same with the more classic Zynga playbook in terms of integration where you utilize the best practices, but you don't do any rationalization or synergy kind of leverage? And then to Alex's question on that run rate for Peak, is that weighted evenly? Or is there differences between Q3s and Q4s?</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>I'll take the second question. In terms of the integration of Rollic, it will follow our playbook. They will continue to drive their business. They are extremely aggressive and focused on hyper-casual and doing a great job.</p> <p>Our job is to, A, not get in the way; but, B, accelerate their progress wherever we can. So if there's things that we can do in data science, UA, our advertising network deals, publishing platform relationships with Apple and Google, all those discussions are well under way. And it's very exciting to see how the two companies come together. From a synergy standpoint, this is a team that's less than 40 people in Istanbul.</p> <p>They have a lot of variable resources in terms of the partners that they work with, but it's a very small team. So it's a very light footprint, and they can then leverage the rest of Zynga's organizational knowledge, institutional information, and capabilities, and that's kind of the excitement and configuration for Rollic. And then Ger can take the question on Peak in terms of how it splits out in Q3 and Q4.</p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. Brian, I would just assume even over the two quarters, that's how it's flowed into the current guidance.</p><p><strong>Brian Fitzgerald</strong> -- <em>Wells Fargo Securities -- Analyst</em></p> <p>Got it. Thanks, guys. I appreciate it.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Colin Sebastian from Baird. Please go ahead. If you have your line muted, please unmute yourself, Colin.</p> <p>OK. Our next question comes from the line of Doug Creutz from Cowen. Please go ahead.</p><p><strong>Doug Creutz</strong> -- <em>Cowen and Company -- Analyst</em></p> <p>Hey, thank you. Can you talk a little bit about what you're seeing in terms of ROIs on UA? It seems like on your Q1 call, you had indicated you were going to lead into lower ROIs and spend more in Q2. It looks like you did but maybe not quite as much as you thought you would. How did that evolve during the quarter? And what are you seeing now? Thank you.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Hey, Doug. The early part of the quarter in that March, April, May time frame, the withdrawal of a lot of brand advertisers and entertainment campaigns opened up opportunities for gaming companies to buy with very good deals, very good returns. So a lot of that activity occupied the first half of the quarter. Once we got to a point where things started to look a little bit different toward the end where brand advertisers came back in and some of the rates went up due to the activity, we, frankly, had a lot of velocity already in the business, and the momentum was good and our organics and engagement were strong.</p> <p>So where we didn't see the returns that we wanted, we pulled back. So from a combination of elements, we're being very selective about where we invest. But that kind of land rush toward a lot of really good deals ended very quickly because a lot of game companies saw it. But as things have gone back to elevated levels above Q1 but not at the peak of COVID in May, we still see good opportunity to grow our businesses, and we're going after it.</p> <p>But we're not necessarily feeling very pressured right now to have to overinvest to it.</p><p><strong>Doug Creutz</strong> -- <em>Cowen and Company -- Analyst</em></p> <p>OK.</p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p> <p>The only -- sorry, Doug. This is Ger. The only thing I would add, sort of building on what Frank just said. If you look at Q2 results, understanding, we were dealing with a COVID quarter, if we want to call it that, I think what you saw in terms of the dynamics in live services is that given the performance of our bold beats and the engagement of our players, we obviously were able to optimize the UA spend, so versus our guidance and versus the prior quarters.</p> <p>That's why, obviously, when you see that strong bookings and optimization, you can deliver north of 25% flow-through.</p><p><strong>Doug Creutz</strong> -- <em>Cowen and Company -- Analyst</em></p> <p>OK. Great.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from the line of Matthew Thornton from Truist Securities. Please go ahead.</p><p><strong>Matthew Thornton</strong> -- <em>Truist Securities -- Analyst</em></p> <p>Yeah, good afternoon. Hey, Frank. Hey, Gerard. Thanks for taking the question.</p> <p>Maybe two if I could. I guess first, on the pipeline, you talked a little bit about starting to bring titles, I think it was plural later on this year. Just wondering if you could provide a little more color on just how you're thinking about impact in the second half from new tiles and any updates you might have on some of the other out your kind of projects that you guys have at least announced previously. And then just secondly, coming back to Rollic for a second, just curious if you can talk a little bit about what the kind of normalized growth rates of that business looks like.</p> <p>Thanks, guys.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Hi, Matt. The new title plan is very much what we communicated in the remarks in terms of the second half. FarmVille 3, Puzzle Combat, and Harry Potter are all making very good progress in soft launch. And we're looking at releasing in the second half when we get to a point where the KPIs demonstrate to us that we have games with great long-term engagement retention, and we can really open them up for a global market.</p> <p>The thing that I would point out is that we did cite that these games would roll out and build over time. So the actual contribution in the second half is minimal. The second half is very much a live services business combined with Peak. Rollic and new games -- Rollic is not in and new games is very small in terms of what we're thinking about on a guidance level.</p> <p>With regards to the growth rate on Rollic, this first half is really doing great in terms of how they're growing. And it's a little hard to tell exactly how long and what form their growth will sustain. But it feels very good to us in terms of how they're bringing in titles, how they're prototyping, how they're bringing in the market. Hopefully, with our help, we can see some optimizations and growth even more so than we're seeing now.</p> <p>But it's exciting to have a growth asset like Rollic come in at the second half of the year for us and really set us up for what, in 2021, could be a great year in terms of growing Rollic. Next question, operator?</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from the line of Matthew Cost from Morgan Stanley. Please go ahead.</p><p><strong>Matthew Cost</strong> -- <em>Morgan Stanley -- Analyst</em></p> <p>Hi, guys. Thanks for taking the question. So when you look at the trends that you're seeing, I guess late into Q2 and now, as we're a month into Q3, where is that tracking versus maybe what you expected at the beginning of the year pre-COVID? And how would you think about, sort of, where we are on the journey to getting back to a pre-COVID run rate? Or put another way, how long do you expect the benefit to stick around for? And then within the context of the portfolio. You've noted that Social Slots and Casual Cards were an area of particular strength.</p> <p>How sustainable do you view the strength in that category relative to the rest of the portfolio? And then I have one follow-up. Thanks.</p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. This is Ger. I'll take the -- in terms of trends, if you look at Q1, obviously, we had a very strong quarter across the live services portfolio. So if I sort of ignore Q2 and look at Q3.</p> <p>We're still showing growth across the live services. So from that perspective, we're happy with where the core business is. And if we hadn't done Peak, we'd still be in a position where we'd be upgrading our guidance, purely based on that aspect of our business. So from that perspective, we're happy.</p> <p>What I will say -- and again, there's still a lot of uncertainty around COVID-19 normalization, back to what normal is. But we have seen the activity in games in July compared to June is mixed across the board. Some are still growing. Some are showing some sort of trends toward what we call a pre-COVID level.</p> <p>But big picture overall, based on our core execution and our bold beat strategy, we're comfortable that we've got a resilient and vibrant live service business and expect to continue that through the end of the year. Obviously, very happy to layer into that the Toy Blast and Toon Blast. And as Frank mentioned, Rollic will come in as long as the deal closes in Q4 to add some additional help to our advertising business. But big picture, we feel good about the fundamentals of Zynga.</p> <p>There's a lot of uncertainty in the market in general. But for what we can control, we feel good that we're executing.</p><p><strong>Matthew Cost</strong> -- <em>Morgan Stanley -- Analyst</em></p> <p>Great. Thanks. Then just quickly on margins. Obviously, it was an extraordinary situation in Q2.</p> <p>But now that you've put up what I think is the highest EBITDA margin in almost a decade, I think at this point, where are you on the path to sort of your near and kind of medium-term margin goals?</p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p> <p>Well, our full-year guidance is indicating, excluding the impact of deferred revenue, we're going to be printing 22%. So we're beyond -- we've actually held, obviously, through the year north of our immediate near-term goal, which was break 20% and sustain. And now it's the path to 25% and beyond. As you said, Q4 of last year was 24%.</p> <p>This quarter was 26%. So you can see the dynamic where you have a stronger level of engagement or monetization in your business in any given quarter, you can break to higher levels. The key, though, is sustaining over time. And we're managing a portfolio and all quarters aren't equal.</p> <p>But as you can see, we're guiding again north of 20% for this quarter and obviously, 22% for the full year. The ultimate outcome for the full year will be a function of how our live services perform. New games will not be a major factor. They'll be a factor from a marketing perspective, but from a bookings perspective, new games in 2020 will be reasonably small compared to the live services performance.</p> <p>But the main wildcard, quite frankly, is marketing. As we see strong results in our live services, it gives us more latitude to optimize our user acquisition. And while there's some uncertainty around what IDFA means, when you look at our diverse portfolio of live service games, and the approach and scale of our audience, we do have levers there to continue to manage that effectively. So I would say printing 22% this year is a good result.</p> <p>And then as we look into the following year, it's going to be the same playbook, continue to execute against our live services, launch these games and steadily scale them. And obviously, we will get a full-year contribution from Peak. And if we close Rollic, which we hope to do October 1, we'll get a full-year contribution from Rollic. So I think we've got the levers to continue to grow not just the bookings but also the EBITDA over time and the operating cash flow.</p><p><strong>Matthew Cost</strong> -- <em>Morgan Stanley -- Analyst</em></p> <p>Great. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from the line of Mike Hickey from The Benchmark company. Please go ahead.</p><p><strong>Mike Hickey</strong> -- <em>The Benchmark Company -- Analyst</em></p> <p>Hey, Frank, Ger, Rebecca. Thanks for taking my questions, guys, and congrats on a pretty incredible quarter. I guess just first on Rollic. When you sort of look at the success of their games, how much is it sort of creative design versus maybe a data-driven science approach or maybe something else? Just sort of wondering how they sort of sustain their competitive position.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Hi, Mike. Thanks for that question and the comments. When we looked at how Rollic builds games, I think one of the things that was so impressive was the top of the funnel for how they actually create products. The combination of their internal studio, which has really generated some of their top installs, but also they have access to a huge network of development start to bring in the best and the brightest, if you will, of ideas from all over the world.</p> <p>We then put those through or Rollic puts those through a very vigorous prototype testing process, where they're looking at efficiency in UA, they're looking at engagement. And then the game gets basically greenlit. And they do this in a matter of days once the prototypes come in, and so it's a very fast-moving process. It's a very scalable process, and it's one that has a lot of access in terms of internal and external ideas.</p> <p>So I think over time, it will be resilient. I think where hyper-casual companies sometimes have seen their growth curves bounce a bit is when they aren't able to manage the top of the funnel. Their releases slow down or the yields don't generate as much as they hope. So there's ways that Rollic is configured that we thought was very innovative and interesting, that would allow us to manage that over time together.</p> <p>Coupled with some of the near-term synergies, I think that we can help them with in terms of data science, UA, ad deal rates, and platforms.</p><p><strong>Mike Hickey</strong> -- <em>The Benchmark Company -- Analyst</em></p> <p>Thanks, Frank. And then you obviously noted -- it looks like you guys want to continue to find success in M&A. Is this hyper-casual sort of the new genre or platform you're going to continue to build on in M&A? And how robust is that market?</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>I think that -- yeah. No, Mike, I think it's a great point that the talent base in mobile is global, and there's a lot of supply of great companies out there, big, small, and different categories in different regions of the world. So consolidation is obviously under way in the interactive category. We're actively participating in growth through finding partnerships with companies out there.</p> <p>This happened to be a hyper-casual acquisition this time last. The one before that was Peak, was more about forever franchises and AAA studio with titles on the way. So from our perspective, when we look at what's next, it's really a huge opportunity for us in terms of looking for not just more hyper-casual game companies but potentially other companies. Scale is going to be increasingly important in mobile.</p> <p>And as we exit this year, our MAUs are going to be somewhere in the neighborhood of $160 million with 40 million DAUs. We have an advertising network. We have a portfolio of eight forever franchises. So we're going to be in a position where smaller developers and midsize developers that maybe aren't able to navigate some of the issues out there are going to be able to partner with Zynga in a way that I think could help them grow and help us grow.</p> <p>So long term, I think there's a lot of opportunity still to go there. But day in and day out with Ger and I and the management team spend all of our time on is growing live services, getting the bold beats out on time, making sure the new game pipeline is tracking. So it's going to be a combination of organic, inorganic as we grow the company over the next several years, not just acquisitions.</p><p><strong>Mike Hickey</strong> -- <em>The Benchmark Company -- Analyst</em></p> <p>Thanks, guys. Best of luck.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks.</p><p><strong>Operator</strong></p><p>Thank you. I show our next question comes from Colin Sebastian from Baird. Please go ahead.</p><p><strong>Colin Sebastian</strong> -- <em>Robert W. Baird -- Analyst</em></p> <p>Great. Thanks, guys. I guess on Merge Magic!, now that's officially your forever franchise, I'm just wondering how that changes, if at all, the way you manage game development or marketing support for the game. And maybe just on your last point regarding organic growth and the 2021 commentary around double-digit bookings, I'm assuming then that that does embed growth for the existing portfolio outside of Peak and Rollic.</p> <p>Thank you.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Colin, the discussion about 2021, we'll get into the more detail on basically the call this back half of this year. But in general, we're looking at -- we're growing the live business regarding new business. Obviously, it's the new stuff that have come in the family. So from our perspective, it is a combination of those elements.</p> <p>And again, we'll get into more detail in the second half of the year on what the constituent components of that '21 guide is. In terms of the Merge Magic! question, now that they've kind of got the game out, and we're starting to scale it, the transition to scalable bold beat and data-driven, as well as creative-driven decision-making in terms of how the year unfolds with road maps, is really where we're transitioning toward with the team. Much like what we did with Dragons. So as we start to evaluate new feature road maps, the team does take on a little bit of a different configuration, not dramatically different.</p> <p>But in the case of where we're at in the development, now that it's out and scaling, we start to shift the focus toward some more segment-level information and designs and new features for the road maps.</p><p><strong>Colin Sebastian</strong> -- <em>Robert W. Baird -- Analyst</em></p> <p>All right. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our last question comes from the line of Drew Crum from Stifel. Please go ahead.</p><p><strong>Drew Crum</strong> -- <em>Stifel Financial Corp. -- Analyst</em></p> <p>OK. Thanks for sneaking me in. Guys, with Peak and now Rollic, would you say you need time to digest these transactions, or would you look to pull the trigger if something else comes along? Trying to gauge your appetite to do more deals over the near term. And then Frank, Zynga Poker, as you referenced in the press release, had its best booking this quarter since 3Q of '18.</p> <p>Understanding it's been somewhat of a struggle to get back to that threshold, based on what you observed in 2Q, how do you see the performance of that franchise going forward? Thanks.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>Thanks, Drew. In terms of appetite for M&A, we actually are -- we're in integration mode right now. So, yes, we're focused on making sure that we deliver the second half of the year, that we successfully continue to integrate Peak and they continue to make our company and business better. And then with Rollic coming in October, there's a lot of work to be done there, so we feel like we've got enough irons in the fire right now in terms of where we're at and how we're positioned.</p> <p>I think looking forward, over the long term, most of the commentary in the prior questions about M&A was more focused on the future, not necessarily right now because I think we've got a really great position right now, and it's about executing and focusing on the deliverables.</p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. I'd just add to Frank's comments. And he said this earlier, every day we wake up, we're focused on our core life business, and Peak is part of that business now. It's two of our forever franchises.</p> <p>It's a team that's integrated already into our weekly revenue calls and is working closely with the live services side of our business. But as I think about it from a CFO perspective, operating the business is core. The other area that's very much a focus for me is ongoing capital allocation. As we mentioned in the investor letter, we will continue to assess raising additional funds to make sure we do have the cash powder to go out and do additional acquisitions in the future.</p> <p>But right now, I would say, I'm focusing more on that and running the business. And key is obviously one of the factors that define the targeting of the close date for Rollic was to make sure we would continue to focus on the core business integrating Peak. And then the team from Rollic can come join us in Q4. What I will tell you is we have the bandwidth to deal with that.</p> <p>We've said that in the past. These two deals are pure in the sense that they're a very tight configuration of creative teams. There's not a lot of overhead and complication to integrate. And that's why they fit very well with the overall configure Zynga.</p> <p>But yes, we're looking forward to printing a very strong results for the full fiscal and obviously entering 2021 with both Peak and Rollic as part of our live teams.</p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p> <p>With regards to the question on Poker, it took a little bit longer than I would have liked and many of us would like, but the game has been rebounding, as you noted. We're very impressed with a lot of the changes and additions that the game team has been making. And as we look forward in terms of Poker, we're excited about the trend that we see there. But we're still ironing out things.</p> <p>We're still working through the process. Q2 was a nice quarter for us. And the key is to sustain that performance, and the team is doing a pretty good job on it right now.</p><p><strong>Operator</strong></p><p>Thank you. Ladies and gentlemen, I show no further questions in the Q&A. [Operator signoff]</p> <p><strong>Duration: 66 minutes</strong></p><h2>Call participants:</h2><p><strong>Rebecca Lau</strong> -- <em>Vice President, Investor Relations, and Corporate Finance</em></p><p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p><p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p><p><strong>Eric Sheridan</strong> -- <em>UBS -- Analyst</em></p><p><strong>Alex Giaimo</strong> -- <em>Jefferies -- Analyst</em></p><p><strong>Mario Lu</strong> -- <em>Barclays -- Analyst</em></p><p><strong>Brian Fitzgerald</strong> -- <em>Wells Fargo Securities -- Analyst</em></p><p><strong>Doug Creutz</strong> -- <em>Cowen and Company -- Analyst</em></p><p><strong>Matthew Thornton</strong> -- <em>Truist Securities -- Analyst</em></p><p><strong>Matthew Cost</strong> -- <em>Morgan Stanley -- Analyst</em></p><p><strong>Mike Hickey</strong> -- <em>The Benchmark Company -- Analyst</em></p><p><strong>Colin Sebastian</strong> -- <em>Robert W. Baird -- Analyst</em></p><p><strong>Drew Crum</strong> -- <em>Stifel Financial Corp. -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/znga">More ZNGA analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zynga. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zynga. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-91878", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZNGA"], "primary_tickers_companies": ["Zynga Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zynga (ZNGA) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 18, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-91878"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-91878", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZNGA"], "primary_tickers_companies": ["Zynga Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zynga (ZNGA) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 18, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ZNGA earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Zynga</strong> <span class="ticker" data-id="270875">(<a href="https://www.fool.com/quote/nasdaq/zynga-inc/znga/">NASDAQ:ZNGA</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 05, 2020</span>, <em id="time">5:00 p.m. ET</em></p>, <h2>Contents:</h2>, , <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul>, , <h2>Prepared Remarks:</h2>, , <br/>, , <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the Zynga second-quarter 2020 results conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today to Rebecca Lau, vice president, investor relations, and corporate finance. Thank you.</p>, , <p>Please go ahead.</p>, <p><strong>Rebecca Lau</strong> -- <em>Vice President, Investor Relations, and Corporate Finance</em></p>, , <p>Thanks, Dylan, and welcome, everyone, to Zynga's second-quarter 2020 earnings call. On the call with me today are Frank Gibeau, our chief executive officer; and Ger Griffin, our chief financial officer. Shortly, we will open up the call for live questions. Before we cover the safe harbor, please note that in an effort to keep our team members healthy, each member on today's call is dialed in remotely.</p>, , <p>We appreciate your understanding during the call and hope that everyone is also safe and well during this time. During the course of today's call, we will make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-Q, as well as elsewhere in our SEC filings for further clarification.</p>, <p></p>, <div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zynga Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZynga%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=27144d1b-81af-447c-b92d-186d37d75637">ten best stocks</a></strong> for investors to buy right now… and Zynga Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZynga%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=27144d1b-81af-447c-b92d-186d37d75637" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>, <p>In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides and when filed, our 10-Q, will include reconciliations of our GAAP and non-GAAP financial measures. Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. This conference call is being webcast and will be available for audio replay on our investor relations website in a few hours.</p>, , <p>Now, I'll turn the call over to Frank for his opening remarks. </p>, <p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p>, , <p>Thanks, Rebecca. Good afternoon, everyone, and thank you for joining our call. We are living in unprecedented times and more people than ever before are turning to games for entertainment and a sense of community. With more people staying at home, we saw heightened levels of player engagement, social connection, and monetization in our portfolio.</p>, , <p>Increased player engagement in our live services drove our exceptional Q2 results including record revenue and bookings performances and our best operating cash flow in more than eight years. We also executed our transformational acquisition of Peak and are entering Q3 with eight forever franchises adding significant scale to our live services foundation. Our new game pipeline is also progressing well, and we expect to begin releasing new titles later this year. Today, we are raising our full-year 2020 revenue and bookings guidance, which Ger will provide more details on later in the call.</p>, , <p>In addition, I am pleased to announce that we have entered into an agreement to acquire Rollic, one of the fastest-growing hyper-casual game companies in 2020. With Rollic, we are meaningfully expanding our entry into hyper-casual, one of the largest and fastest-growing game categories on mobile, while adding a highly talented team and an extensive network of external developers to Zynga. Our performance to date demonstrates strong execution of our multiyear growth strategy of, A, growing our live services; B, adding new forever franchises to our portfolio; and, C, adding new platforms in markets and technology. Additionally, we continue to see opportunities to enhance each of these growth pillars through acquisitions.</p>, , <p>First, our strength in live services is the foundation of our multiyear growth strategy. In Q2, our live services, anchored by our forever franchises and social slots and casual cards portfolios, drove our best revenue and bookings quarter in Zynga history, with revenue up 47% year over year and bookings up 38% year over year. During the quarter, we achieved many new records as more people turn to our deeply social game experiences while sheltering in place and as players enjoyed our robust lineup of bold beats. For example, within Empires & Puzzles, Merge Magic! and Hit It Rich! Slots, we recently introduced Battle Pass features, which have been well received by players and are proving to be positive drivers of engagement and monetization.</p>, , <p>We are also continuing to integrate and expand popular brands within our live services, including Fast & Furious in CSR2, Rick and Morty and Merge Dragons! and a new Dragons of Westeros feature in Game of Thrones Slots Casino. All of this is fueled by our proven and scalable live services capabilities comprised of best-in-class product management, data science, user acquisition, advertising, and platform relationships. Second, our goal is to add new forever franchises to our live services portfolio. Our recent acquisition of Peak brings one of the world's best puzzle game makers to Zynga, and their two top-charting games, Toon Blast and Toy Blast.</p>, , <p>These two titles have captured a highly engaged global audience base with some of the industry's best player retention and currently have more than 12 million mobile DAUs and 26 million mobile MAUs. These titles expand our live services to eight forever franchises, increasing the scale and resiliency of our portfolio. We are also making good progress on our three new games in soft launch: FarmVille 3, Harry Potter: Puzzles & Spells, and Puzzle Combat. We have introduced new features to provide players with more content, quests, and ways to customize their gaming experiences and have expanded into additional soft launch territories to continue gathering player feedback.</p>, , <p>Our soft launch process includes careful testing and iteration of game features with the goal of delivering long-term retention. We expect to begin releasing new games later this year and anticipate these titles will steadily scale over time. Third, mobile is continuously evolving, and we are investing in new platforms, markets, and technologies to increase our total addressable market and drive further growth. Today, we announced our agreement to acquire Rollic, a developer and publisher with a portfolio of popular hyper-casual games that have collectively been downloaded more than 250 million times.</p>, , <p>Eight of Rollic's games have reached No. 1 or No. 2 top three downloaded games in the U.S. App Store.</p>, , <p>And their latest releases, Go Knots 3D and Tangle Master 3D were the top two most downloaded games in the U.S. App Store in Q2 2020. With this acquisition, we are excited to enter the hyper-casual market, one of the largest and fastest-growing mobile gaming categories. The growth of this category is fueled by advertising-driven games that are highly accessible and appeal to a broad audience globally.</p>, , <p>With more than 5 million mobile DAUs and 65 million mobile MAUs, we expect Rollic to meaningfully increase our audience and expand and diversify our advertising business. In addition, we are driving strong growth in international markets, with Q2 revenue and bookings up 56% and 34% year over year, respectively. And Android revenue and bookings up 61% and 43% year over year. With Toon Blast and Toy Blast, we will further increase our international business, especially in Japan.</p>, , <p>In terms of new platform investments, we released Bumped Out, our second title on the Snap Games platform as a part of a new multi-game partnership with Snap, as well as our first voice-based game, Word Pop, exclusively for Amazon Alexa. We also produced a two-hour live-streaming event with Amazon Twitch Prime for Words with Friends in collaboration with Garth Brooks and Tricia Yearwood that entertained more than 3 million total viewers. While our investments in these and other initiatives are in the early stages, we believe they have the potential to increase our growth over the long term. Last, we continue to see opportunities to acquire talented teams and franchises to further accelerate our growth.</p>, , <p>The talent base for mobile gaming is global. And the mobile platform is vast and constantly evolving with new innovations emerging every year. To date, our acquisitions have delivered strong contributions to our live services, added multiple new forever franchises to our portfolio, expanded our new game pipeline, and opened up new categories for us on mobile. Our proven integration model enables teams to maintain their unique development cultures while leveraging Zynga's highly scalable studio operations and publishing platform so we can collectively grow faster together.</p>, , <p>Now, I would like to turn the call over to Ger to discuss our Q2 results in further detail, as well as our outlook for 2020 and beyond.</p>, <p><strong>Ger Griffin</strong> -- <em>Chief Financial Officer</em></p>, , <p>Thank you, Frank. We capped off a great first-half performance with tremendous Q2 results, delivering our best quarterly revenue and bookings in Zynga history. Strength across our live services delivered a better-than-expected top line and operating leverage. We're also happy to now have Peak in the Zynga family, having closed this transformational acquisition on July 1, bringing to Zynga an amazingly talented studio with two top-charting franchises in Toon Blast and Toy Blast.</p>, , <p>Given the strength in our live services, including a full half-of-the-year contribution from Peak, we are raising our full-year outlook for revenue and bookings. But first, let's discuss our Q2 results. Revenue was $452 million comprised of bookings of $518 million offset by a net increase in deferred revenue of $66 million. Revenue was $22 million ahead of our raised guidance, driven by an $18 million bookings beat and a $4 million lower-than-expected net increase in deferred revenue.</p>, , <p>Broad-based strength across our live services drove our top-line beat, in particular, stronger-than-expected performances from our Social Slots portfolio, Words with Friends, CSR2, Empires & Puzzles versus our raised guidance. Revenue was $145 million or 47% up year over year, driven by bookings growth of $142 million or 38% year over year and a $3 million lower net increase in deferred revenue. Our year-over-year revenue and bookings growth was driven by broad-based strength across our mobile live services, in particular, from Empires & Puzzles, Merge Dragons!, Merge Magic!, and Game of Thrones Slots Casino. User pay was the driver of our top-line growth with advertising as expected, moderately down year over year.</p>, , <p>The net increase in deferred revenue was $66 million and was driven primarily by bookings from Empires & Puzzles and Merge Dragons!. We ended Q2 with a deferred revenue balance of $523 million versus $358 million a year ago. Turning to our Q2 operating expenses. GAAP operating expenses were $402 million, up $161 million or 67% year over year, primarily driven by higher contingent consideration expense, marketing investments, and acquisition-related expenses versus our prior year.</p>, , <p>Our Small Giant Games and Gram Games acquisitions continue to perform ahead of our expectations, resulting in $149 million contingent consideration expense, up $125 million year over year and $24 million ahead of our guidance. The increase in marketing was primarily due to the year-over-year addition of Merge Magic! and the overall investments across our live services portfolio, as well as games in test markets. Year over year, GAAP operating expenses increased to 89% versus 79% of revenue primarily due to the material increase in contingent consideration expense. Non-GAAP operating expenses were $222 million, up $25 million or 13% year over year primarily due to the increase in marketing investments.</p>, , <p>Non-GAAP operating expenses represented 43% of bookings down from 52% of bookings in the prior year, primarily driven by our improved operating leverage in all expense lines. We reported a net loss of $150 million, $10 million better than our guidance and $94 million higher than our net loss of $56 million a year ago. The variance to guidance was driven primarily by the burden expected operating performance, partially offset by the higher contingent consideration expense. The variance to prior year was driven primarily by the higher contingent consideration and income tax expense, partially offset by our improved operating performance.</p>, , <p>Our adjusted EBITDA was $70 million, $35 million better than our guidance, primarily due to our higher-than-expected top-line performance and lower-than-anticipated marketing expenses. On a year-over-year basis, adjusted EBITDA increased $67 million on strong operating performance. We generated operating cash flow of $145 million, our best performance since 2011 and up 47% year over year. As of June 30, we had $1.6 billion of cash and investments.</p>, , <p>As of today, we have approximately $620 million in cash and investments, with the main material payments in July being the $923 million related to the acquisition of Peak and $68 million for our latest earnout payment to Gram Games. We also have $150 million available under our existing credit facility with no amounts outstanding. Looking forward, we expect positive operating cash flow through the balance of 2020 and are assessing debt financing alternatives to further expand our cash reserves, which we expect will be primarily used to fund future acquisitions to further accelerate our growth. Now, I would like to take a few moments to comment on our proposed acquisition of Rollic.</p>, , <p>Today, we announced an agreement to acquire Istanbul-based Rollic, a mobile games developer and publisher with an exciting portfolio of popular hyper-casual games. This acquisition gives Zynga a more meaningful presence on one of the largest and fastest-growing gaming categories on mobile and also adds a highly talented team and an extensive network of external developers. Rollic's titles currently have more than 5 million mobile DAUs and 65 million mobile MAUs, which will meaningfully increase our audience and grow our advertising business. We are initially acquiring 80% of Rollic for $168 million in cash at an implied valuation of $210 million for the total company.</p>, , <p>While we are not disclosing specific valuation multiples for this transaction, for full-year 2020 on a stand-alone basis, Rollic is on track to deliver just north of $100 million of revenue and bookings and margins broadly in line with those of Zynga for 2020. Over the next three years, Zynga will acquire the remaining 20% in equal installments at valuations based on specific bookings and profitability goals. The transaction is subject to customary closing adjustments, and we expect it to close on October 1, 2020. Thirdly, while we expect the acquisition of Rollic to close on October 1, our current guidance does not include any contribution from Rollic.</p>, , <p>Now, turning to guidance. We have developed our Q3 and full-year 2020 guidance based on the information available to us today, August 5, 2020, and using similar methodologies to prior quarters. Given the higher level of uncertainty in the industry, in particular around the COVID-19 crisis, there is the potential for a wider range of outcomes, both positive and negative, as it relates to our ultimate business results. That said, let's discuss our Q3 and 2020 guidance.</p>, , <p>Guidance for Q3 is as follows: revenue of $445 million, up $100 million or 29% year over year; a net increase in deferred revenue of $175 million to $50 million in the prior year; bookings of $620 million, up $225 million or 57% year over year; a net loss of $160 million versus net income of $230 million in the prior year; adjusted EBITDA loss of $45 million versus adjusted EBITDA of $28 million in the prior year. Some factors to consider in assessing our Q3 guidance include live services will drive the vast majority of our top-line performance, led by our forever franchises, including full quarter contributions from Toon Blast, Toy Blast, and Merge Magic!. This overall momentum will be partially offset by year-over-year declines in older mobile and web titles. We also expect the year-over-year user -- excuse me, we also expect that year-over-year user-pay growth will more than offset declines in advertising yields.</p>, , <p>With our acquisition of Peak, we have added two forever franchises, Toon Blast and Toy Blast, to our portfolio. As these are new to Zynga consistent with standard accounting practice, we expect a material net increase in deferred revenue as the majority of the initial bookings associated with these titles will be deferred for recognition as revenue in future quarters. Accordingly, in Q3, we expect a net increase in deferred revenue of $175 million. This represents the largest quarterly increase in deferred revenue in Zynga history and compares to a net increase of $50 million in Q3 2019.</p>, , <p>The year-over-year change in this GAAP revenue deferral is a meaningful factor in year-over-year comparability as it represents a $125 million year-over-year decrease in revenue, gross profit, net income, and adjusted EBITDA. We expect gross margins to be significantly down year over year due to the higher net increase in deferred revenue, amortization of acquired intangibles, and user-pay mix in Q3 2020 versus Q3 2019. We also anticipate our GAAP operating expenses as a percentage of revenue to increase year over year primarily due to the impact of the higher net increase in deferred revenue, partially offset by a lower contingent consideration expense year over year. Outside of these factors, we anticipate year-over-year improvements in operating leverage in R&D and G&A, partially offset by higher marketing investments across our live services portfolio and new game pipeline.</p>, , <p>We expect a net loss of $160 million in Q3 2020. This compares to net income of $230 million in Q3 2019, which included a one-time gain of $314 million related to the sale of our San Francisco building. Other drivers of the year-over-year change in net loss are the higher net increase in deferred revenue, amortization of acquired intangibles and stock-based compensation, partially offset by our improved operating performance and lower contingent consideration expense. We expect an adjusted EBITDA loss of $45 million in Q3 2020 versus adjusted EBITDA of $28 million in Q3 2019.</p>, , <p>This year-over-year change is primarily driven by the $125 million year-over-year growth in the net increase in deferred revenue, partially offset by our improved operating performance. Now, turning to 2020, our revised guidance is as follows: revenue of $1.8 billion, up $478 million or 36% year over year and up $110 million versus our prior guidance; a net increase in deferred revenue of $400 million or $158 million or 65% year over year and up $250 million versus our prior guidance; bookings of $2.2 billion, up $636 million or 41% year over year and up $360 million versus our prior guidance; a net loss of $550 million to net income of $42 million in 2019 and $200 million higher than our prior guidance of a net loss of $350 million; adjusted EBITDA of $85 million, down $2 million or 3% year over year and down $138 million versus our prior guidance. Our guidance assumes that live services will deliver the vast majority of our top-line performance, driven by our forever franchises, include full-year contributions from the recently acquired Toon Blast and Toy Blast franchises, as well as initial contributions from new games that we expect to launch later this year. We also expect year-over-year user-pay growth to more than offset declines in advertising yields.</p>, , <p>We expect a net increase in deferred revenue of $400 million, an increase of $250 million versus our prior guidance primarily due to the deferral of the majority of initial bookings from our recently acquired franchises, Toon Blast and Toy Blast. The year-over-year change in this GAAP deferral is a meaningful factor in year-over-year comparability as it represents a $158 million year-over-year decrease in revenue, gross profit, net income, and adjusted EBITDA. We expect gross margins to be significantly down year over year primarily due to the higher net increase in deferred revenue, additional amortization of acquired intangibles, and user-pay mix in 2020 versus 2019. Given the higher net increase in deferred revenue and contingent consideration expense in 2020 versus 2019, we expect GAAP operating expenses as a percentage of revenue to decrease year over year.</p>, , <p>Outside of these factors, we anticipate improvement in operating leverage from R&D and G&A, which should be partially offset by increased marketing investments in our live services and new game launches. Operating leverage will ultimately be a function of our live services performance, user pay versus advertising mix, timing of our new game launches, and the level of marketing invested in scaling our live services and new titles. In 2020, we expect a net loss of $550 million, $200 million higher than our prior guidance of $350 million primarily due to the acquisition of Peak and its resulting impact on the net increase in deferred revenue, amortization of acquired intangibles, stock-based compensation, partially offset by income tax benefits and operating contribution from the acquired titles. This compares to a net income of $42 million in 2019, which included a one-time gain of $314 million related to the sale of our San Francisco building.</p>, , <p>The other primary drivers of the year-over-year change in net loss are the higher net increase in deferred revenue and contingent consideration expense, with our improved operating performance offsetting the year-over-year dilutive changes in other GAAP-to-non-GAAP reconciling items. We expect adjusted EBITDA of $85 million, down $138 million versus our prior guidance as our stronger operating performance will be more than offset by the additional $250 million of net increase in deferred revenue. On a year-over-year basis, we anticipate adjusted EBITDA will be down $2 million, driven primarily by the $158 million year-over-year growth in our net increase in deferred revenue, largely offset by our improved operating performance. Our strong execution in 2020 should position Zynga for continued growth in 2021 where we expect double-digit top-line growth, the potential for further margin expansion, and positive operating cash flow.</p>, , <p>In summary, while we are operating in unprecedented times, we remain focused on entertaining and connecting our players through our games. Our business fundamentals are strong, and we are continuing to execute on our multiyear growth strategy. With that, I will turn the call back to Frank.</p>, <p><strong>Frank Gibeau</strong> -- <em>Chief Executive Officer</em></p>, , <p>Thanks, Ger. Before we open the call to live Q&A, I want to take a moment to touch on our current operating environment. First, we hope that all of you are safe and well along with your family, friends, and colleagues. In these challenging times, the health and safety of our teams have been a top priority.</p>, , <p>We're extremely proud of how Zynga has seamlessly transitioned to a work-from-home configuration without any material disruptions to our operations and while delivering new features, content, and products for our players. We anticipate that our North American offices will work from home through early 2021, while our international-based offices will begin to reopen based on guidance from local authorities. To support our teams, over the past several months, we have updated and introduced many new health and wellness benefits, programs, and services to assist with work-from-home needs. We also continued to support our communities.</p>, , ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zynga. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-91878", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZNGA"], "primary_tickers_companies": ["Zynga Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zynga (ZNGA) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 18, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-91878"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-91878", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-technology-and-telecom", "tickers": "[\"\"]", "primary_tickers": ["ZNGA"], "primary_tickers_companies": ["Zynga Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zynga (ZNGA) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 18, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ZNGA earnings call for the period ending June 30, 2020. | Ladies and gentlemen, thank you for standing by, and welcome to the Zynga second-quarter 2020 results conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today to Rebecca Lau, vice president, investor relations, and corporate finance. Thank you.\n Please go ahead.\n Thanks, Dylan, and welcome, everyone, to Zynga's second-quarter 2020 earnings call. On the call with me today are Frank Gibeau, our chief executive officer; and Ger Griffin, our chief financial officer. Shortly, we will open up the call for live questions. Before we cover the safe harbor, please note that in an effort to keep our team members healthy, each member on today's call is dialed in remotely.\n We appreciate your understanding during the call and hope that everyone is also safe and well during this time. During the course of today's call, we will make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-Q, as well as elsewhere in our SEC filings for further clarification.\n In addition, we will also discuss non-GAAP financial measures. Our earnings letter, earnings slides and when filed, our 10-Q, will include reconciliations of our GAAP and non-GAAP financial measures. Please be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. This conference call is being webcast and will be available for audio replay on our investor relations website in a few hours.\n Thanks, Rebecca. Good afternoon, everyone, and thank you for joining our call. We are living in unprecedented times and more people than ever before are turning to games for entertainment and a sense of community. With more people staying at home, we saw heightened levels of player engagement, social connection, and monetization in our portfolio.\n Increased player engagement in our live services drove our exceptional Q2 results including record revenue and bookings performances and our best operating cash flow in more than eight years. We also executed our transformational acquisition of Peak and are entering Q3 with eight forever franchises adding significant scale to our live services foundation. Our new game pipeline is also progressing well, and we expect to begin releasing new titles later this year. Today, we are raising our full-year 2020 revenue and bookings guidance, which Ger will provide more details on later in the call.\n In addition, I am pleased to announce that we have entered into an agreement to acquire Rollic, one of the fastest-growing hyper-casual game companies in 2020. With Rollic, we are meaningfully expanding our entry into hyper-casual, one of the largest and fastest-growing game categories on mobile, while adding a highly talented team and an extensive network of external developers to Zynga. Our performance to date demonstrates strong execution of our multiyear growth strategy of, A, growing our live services; B, adding new forever franchises to our portfolio; and, C, adding new platforms in markets and technology. Additionally, we continue to see opportunities to enhance each of these growth pillars through acquisitions.\n First, our strength in live services is the foundation of our multiyear growth strategy. In Q2, our live services, anchored by our forever franchises and social slots and casual cards portfolios, drove our best revenue and bookings quarter in Zynga history, with revenue up 47% year over year and bookings up 38% year over year. During the quarter, we achieved many new records as more people turn to our deeply social game experiences while sheltering in place and as players enjoyed our robust lineup of bold beats. For example, within Empires & Puzzles, Merge Magic! and Hit It Rich! Slots, we recently introduced Battle Pass features, which have been well received by players and are proving to be positive drivers of engagement and monetization.\n We are also continuing to integrate and expand popular brands within our live services, including Fast & Furious in CSR2, Rick and Morty and Merge Dragons! and a new Dragons of Westeros feature in Game of Thrones Slots Casino. All of this is fueled by our proven and scalable live services capabilities comprised of best-in-class product management, data science, user acquisition, advertising, and platform relationships. Second, our goal is to add new forever franchises to our live services portfolio. Our recent acquisition of Peak brings one of the world's best puzzle game makers to Zynga, and their two top-charting games, Toon Blast and Toy Blast.\n These two titles have captured a highly engaged global audience base with some of the industry's best player retention and currently have more than 12 million mobile DAUs and 26 million mobile MAUs. These titles expand our live services to eight forever franchises, increasing the scale and resiliency of our portfolio. We are also making good progress on our three new games in soft launch: FarmVille 3, Harry Potter: Puzzles & Spells, and Puzzle Combat. We have introduced new features to provide players with more content, quests, and ways to customize their gaming experiences and have expanded into additional soft launch territories to continue gathering player feedback.\n Our soft launch process includes careful testing and iteration of game features with the goal of delivering long-term retention. We expect to begin releasing new games later this year and anticipate these titles will steadily scale over time. Third, mobile is continuously evolving, and we are investing in new platforms, markets, and technologies to increase our total addressable market and drive further growth. Today, we announced our agreement to acquire Rollic, a developer and publisher with a portfolio of popular hyper-casual games that have collectively been downloaded more than 250 million times.\n Eight of Rollic's games have reached No. 1 or No. 2 top three downloaded games in the U.S. App Store.\n And their latest releases, Go Knots 3D and Tangle Master 3D were the top two most downloaded games in the U.S. App Store in Q2 2020. With this acquisition, we are excited to enter the hyper-casual market, one of the largest and fastest-growing mobile gaming categories. The growth of this category is fueled by advertising-driven games that are highly accessible and appeal to a broad audience globally.\n With more than 5 million mobile DAUs and 65 million mobile MAUs, we expect Rollic to meaningfully increase our audience and expand and diversify our advertising business. In addition, we are driving strong growth in international markets, with Q2 revenue and bookings up 56% and 34% year over year, respectively. And Android revenue and bookings up 61% and 43% year over year. With Toon Blast and Toy Blast, we will further increase our international business, especially in Japan.\n In terms of new platform investments, we released Bumped Out, our second title on the Snap Games platform as a part of a new multi-game partnership with Snap, as well as our first voice-based game, Word Pop, exclusively for Amazon Alexa. We also produced a two-hour live-streaming event with Amazon Twitch Prime for Words with Friends in collaboration with Garth Brooks and Tricia Yearwood that entertained more than 3 million total viewers. While our investments in these and other initiatives are in the early stages, we believe they have the potential to increase our growth over the long term. Last, we continue to see opportunities to acquire talented teams and franchises to further accelerate our growth.\n The talent base for mobile gaming is global. And the mobile platform is vast and constantly evolving with new innovations emerging every year. To date, our acquisitions have delivered strong contributions to our live services, added multiple new forever franchises to our portfolio, expanded our new game pipeline, and opened up new categories for us on mobile. Our proven integration model enables teams to maintain their unique development cultures while leveraging Zynga's highly scalable studio operations and publishing platform so we can collectively grow faster together.\n Now, I would like to turn the call over to Ger to discuss our Q2 results in further detail, as well as our outlook for 2020 and beyond.\n Thank you, Frank. We capped off a great first-half performance with tremendous Q2 results, delivering our best quarterly revenue and bookings in Zynga history. Strength across our live services delivered a better-than-expected top line and operating leverage. We're also happy to now have Peak in the Zynga family, having closed this transformational acquisition on July 1, bringing to Zynga an amazingly talented studio with two top-charting franchises in Toon Blast and Toy Blast.\n Given the strength in our live services, including a full half-of-the-year contribution from Peak, we are raising our full-year outlook for revenue and bookings. But first, let's discuss our Q2 results. Revenue was $452 million comprised of bookings of $518 million offset by a net increase in deferred revenue of $66 million. Revenue was $22 million ahead of our raised guidance, driven by an $18 million bookings beat and a $4 million lower-than-expected net increase in deferred revenue.\n Broad-based strength across our live services drove our top-line beat, in particular, stronger-than-expected performances from our Social Slots portfolio, Words with Friends, CSR2, Empires & Puzzles versus our raised guidance. Revenue was $145 million or 47% up year over year, driven by bookings growth of $142 million or 38% year over year and a $3 million lower net increase in deferred revenue. Our year-over-year revenue and bookings growth was driven by broad-based strength across our mobile live services, in particular, from Empires & Puzzles, Merge Dragons!, Merge Magic!, and Game of Thrones Slots Casino. User pay was the driver of our top-line growth with advertising as expected, moderately down year over year.\n The net increase in deferred revenue was $66 million and was driven primarily by bookings from Empires & Puzzles and Merge Dragons!. We ended Q2 with a deferred revenue balance of $523 million versus $358 million a year ago. Turning to our Q2 operating expenses. GAAP operating expenses were $402 million, up $161 million or 67% year over year, primarily driven by higher contingent consideration expense, marketing investments, and acquisition-related expenses versus our prior year.\n Our Small Giant Games and Gram Games acquisitions continue to perform ahead of our expectations, resulting in $149 million contingent consideration expense, up $125 million year over year and $24 million ahead of our guidance. The increase in marketing was primarily due to the year-over-year addition of Merge Magic! and the overall investments across our live services portfolio, as well as games in test markets. Year over year, GAAP operating expenses increased to 89% versus 79% of revenue primarily due to the material increase in contingent consideration expense. Non-GAAP operating expenses were $222 million, up $25 million or 13% year over year primarily due to the increase in marketing investments.\n Non-GAAP operating expenses represented 43% of bookings down from 52% of bookings in the prior year, primarily driven by our improved operating leverage in all expense lines. We reported a net loss of $150 million, $10 million better than our guidance and $94 million higher than our net loss of $56 million a year ago. The variance to guidance was driven primarily by the burden expected operating performance, partially offset by the higher contingent consideration expense. The variance to prior year was driven primarily by the higher contingent consideration and income tax expense, partially offset by our improved operating performance.\n Our adjusted EBITDA was $70 million, $35 million better than our guidance, primarily due to our higher-than-expected top-line performance and lower-than-anticipated marketing expenses. On a year-over-year basis, adjusted EBITDA increased $67 million on strong operating performance. We generated operating cash flow of $145 million, our best performance since 2011 and up 47% year over year. As of June 30, we had $1.6 billion of cash and investments.\n As of today, we have approximately $620 million in cash and investments, with the main material payments in July being the $923 million related to the acquisition of Peak and $68 million for our latest earnout payment to Gram Games. We also have $150 million available under our existing credit facility with no amounts outstanding. Looking forward, we expect positive operating cash flow through the balance of 2020 and are assessing debt financing alternatives to further expand our cash reserves, which we expect will be primarily used to fund future acquisitions to further accelerate our growth. Now, I would like to take a few moments to comment on our proposed acquisition of Rollic.\n Today, we announced an agreement to acquire Istanbul-based Rollic, a mobile games developer and publisher with an exciting portfolio of popular hyper-casual games. This acquisition gives Zynga a more meaningful presence on one of the largest and fastest-growing gaming categories on mobile and also adds a highly talented team and an extensive network of external developers. Rollic's titles currently have more than 5 million mobile DAUs and 65 million mobile MAUs, which will meaningfully increase our audience and grow our advertising business. We are initially acquiring 80% of Rollic for $168 million in cash at an implied valuation of $210 million for the total company.\n While we are not disclosing specific valuation multiples for this transaction, for full-year 2020 on a stand-alone basis, Rollic is on track to deliver just north of $100 million of revenue and bookings and margins broadly in line with those of Zynga for 2020. Over the next three years, Zynga will acquire the remaining 20% in equal installments at valuations based on specific bookings and profitability goals. The transaction is subject to customary closing adjustments, and we expect it to close on October 1, 2020. Thirdly, while we expect the acquisition of Rollic to close on October 1, our current guidance does not include any contribution from Rollic.\n Now, turning to guidance. We have developed our Q3 and full-year 2020 guidance based on the information available to us today, August 5, 2020, and using similar methodologies to prior quarters. Given the higher level of uncertainty in the industry, in particular around the COVID-19 crisis, there is the potential for a wider range of outcomes, both positive and negative, as it relates to our ultimate business results. That said, let's discuss our Q3 and 2020 guidance.\n Guidance for Q3 is as follows: revenue of $445 million, up $100 million or 29% year over year; a net increase in deferred revenue of $175 million to $50 million in the prior year; bookings of $620 million, up $225 million or 57% year over year; a net loss of $160 million versus net income of $230 million in the prior year; adjusted EBITDA loss of $45 million versus adjusted EBITDA of $28 million in the prior year. Some factors to consider in assessing our Q3 guidance include live services will drive the vast majority of our top-line performance, led by our forever franchises, including full quarter contributions from Toon Blast, Toy Blast, and Merge Magic!. This overall momentum will be partially offset by year-over-year declines in older mobile and web titles. We also expect the year-over-year user -- excuse me, we also expect that year-over-year user-pay growth will more than offset declines in advertising yields.\n With our acquisition of Peak, we have added two forever franchises, Toon Blast and Toy Blast, to our portfolio. As these are new to Zynga consistent with standard accounting practice, we expect a material net increase in deferred revenue as the majority of the initial bookings associated with these titles will be deferred for recognition as revenue in future quarters. Accordingly, in Q3, we expect a net increase in deferred revenue of $175 million. This represents the largest quarterly increase in deferred revenue in Zynga history and compares to a net increase of $50 million in Q3 2019.\n The year-over-year change in this GAAP revenue deferral is a meaningful factor in year-over-year comparability as it represents a $125 million year-over-year decrease in revenue, gross profit, net income, and adjusted EBITDA. We expect gross margins to be significantly down year over year due to the higher net increase in deferred revenue, amortization of acquired intangibles, and user-pay mix in Q3 2020 versus Q3 2019. We also anticipate our GAAP operating expenses as a percentage of revenue to increase year over year primarily due to the impact of the higher net increase in deferred revenue, partially offset by a lower contingent consideration expense year over year. Outside of these factors, we anticipate year-over-year improvements in operating leverage in R&D and G&A, partially offset by higher marketing investments across our live services portfolio and new game pipeline.\n We expect a net loss of $160 million in Q3 2020. This compares to net income of $230 million in Q3 2019, which included a one-time gain of $314 million related to the sale of our San Francisco building. Other drivers of the year-over-year change in net loss are the higher net increase in deferred revenue, amortization of acquired intangibles and stock-based compensation, partially offset by our improved operating performance and lower contingent consideration expense. We expect an adjusted EBITDA loss of $45 million in Q3 2020 versus adjusted EBITDA of $28 million in Q3 2019.\n This year-over-year change is primarily driven by the $125 million year-over-year growth in the net increase in deferred revenue, partially offset by our improved operating performance. Now, turning to 2020, our revised guidance is as follows: revenue of $1.8 billion, up $478 million or 36% year over year and up $110 million versus our prior guidance; a net increase in deferred revenue of $400 million or $158 million or 65% year over year and up $250 million versus our prior guidance; bookings of $2.2 billion, up $636 million or 41% year over year and up $360 million versus our prior guidance; a net loss of $550 million to net income of $42 million in 2019 and $200 million higher than our prior guidance of a net loss of $350 million; adjusted EBITDA of $85 million, down $2 million or 3% year over year and down $138 million versus our prior guidance. Our guidance assumes that live services will deliver the vast majority of our top-line performance, driven by our forever franchises, include full-year contributions from the recently acquired Toon Blast and Toy Blast franchises, as well as initial contributions from new games that we expect to launch later this year. We also expect year-over-year user-pay growth to more than offset declines in advertising yields.\n We expect a net increase in deferred revenue of $400 million, an increase of $250 million versus our prior guidance primarily due to the deferral of the majority of initial bookings from our recently acquired franchises, Toon Blast and Toy Blast. The year-over-year change in this GAAP deferral is a meaningful factor in year-over-year comparability as it represents a $158 million year-over-year decrease in revenue, gross profit, net income, and adjusted EBITDA. We expect gross margins to be significantly down year over year primarily due to the higher net increase in deferred revenue, additional amortization of acquired intangibles, and user-pay mix in 2020 versus 2019. Given the higher net increase in deferred revenue and contingent consideration expense in 2020 versus 2019, we expect GAAP operating expenses as a percentage of revenue to decrease year over year.\n Outside of these factors, we anticipate improvement in operating leverage from R&D and G&A, which should be partially offset by increased marketing investments in our live services and new game launches. Operating leverage will ultimately be a function of our live services performance, user pay versus advertising mix, timing of our new game launches, and the level of marketing invested in scaling our live services and new titles. In 2020, we expect a net loss of $550 million, $200 million higher than our prior guidance of $350 million primarily due to the acquisition of Peak and its resulting impact on the net increase in deferred revenue, amortization of acquired intangibles, stock-based compensation, partially offset by income tax benefits and operating contribution from the acquired titles. This compares to a net income of $42 million in 2019, which included a one-time gain of $314 million related to the sale of our San Francisco building.\n The other primary drivers of the year-over-year change in net loss are the higher net increase in deferred revenue and contingent consideration expense, with our improved operating performance offsetting the year-over-year dilutive changes in other GAAP-to-non-GAAP reconciling items. We expect adjusted EBITDA of $85 million, down $138 million versus our prior guidance as our stronger operating performance will be more than offset by the additional $250 million of net increase in deferred revenue. On a year-over-year basis, we anticipate adjusted EBITDA will be down $2 million, driven primarily by the $158 million year-over-year growth in our net increase in deferred revenue, largely offset by our improved operating performance. Our strong execution in 2020 should position Zynga for continued growth in 2021 where we expect double-digit top-line growth, the potential for further margin expansion, and positive operating cash flow.\n In summary, while we are operating in unprecedented times, we remain focused on entertaining and connecting our players through our games. Our business fundamentals are strong, and we are continuing to execute on our multiyear growth strategy. With that, I will turn the call back to Frank.\n Thanks, Ger. Before we open the call to live Q&A, I want to take a moment to touch on our current operating environment. First, we hope that all of you are safe and well along with your family, friends, and colleagues. In these challenging times, the health and safety of our teams have been a top priority.\n We're extremely proud of how Zynga has seamlessly transitioned to a work-from-home configuration without any material disruptions to our operations and while delivering new features, content, and products for our players. We anticipate that our North American offices will work from home through early 2021, while our international-based offices will begin to reopen based on guidance from local authorities. To support our teams, over the past several months, we have updated and introduced many new health and wellness benefits, programs, and services to assist with work-from-home needs. We also continued to support our communities.\n And in Q2, we donated over $2 million to a variety of causes. In addition, we are committing $25 million over the next five years toward diversity and inclusion initiatives at Zynga and in the overall gaming industry. In summary, supporting our teams, communities, and Zynga's founding mission to connect the world through games has never been more important. Our business fundamentals are strong, and we are incredibly excited by the growth and innovation ahead for interactive entertainment.\n It's increasingly clear that games are emerging as powerful new social networks where people around the world come together to connect, play, and socialize. Zynga is uniquely well-positioned within this landscape as a leading mobile-first free-to-play live services social game company with a portfolio of proven franchises. We are on track to deliver a record year for Zynga in 2020 and are positioned for further growth in 2021, where we expect double-digit growth, top-line growth, the potential for further margin expansion, and positive operating cash flow. With that, I would now like to open up the call to your questions.\n | Zynga | (NASDAQ:ZNGA) | Aug 05, 2020 | 5:00 p.m. ET | 5 | pm | 2020-08-05 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NASDAQ | Thanks, Dylan, and welcome, everyone, to Zynga's second-quarter 2020 earnings call. | Thanks, Dylan, and welcome, everyone, to Zynga's second-quarter 2020 earnings call. | [0.70236534 0.02087936 0.2767553 ] | positive | 0.681486 | 2020-08-07 | 10.570000 | 10.680000 | 9.910000 | 9.950000 | 41908416.0 | 9.700000 | 10.159900 | 9.600000 | 9.730000 | 43213840.0 | Media | 2020-06-30 | 2020-06-30 | 0.10 | 0.084915 | 2020-06-30 | ZNGA | 0.015085 | beat | -0.840000 | decrease | 0 | positive |
| 599 | ZS | /earnings/call-transcripts/2020/09/10/zscaler-inc-zs-q4-2020-earnings-call-transcript/ | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Zscaler, Inc.</strong> <span class="ticker" data-id="339947">(<a href="https://www.fool.com/quote/nasdaq/zscaler/zs/">NASDAQ:ZS</a>)</span><br/>Q4 2020 Earnings Call<br/><span id="date">Sep 09, 2020</span>, <em id="time">4:30 p.m. ET</em></p><h2>Contents:</h2> <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul> <h2>Prepared Remarks:</h2> <br/> <p><strong>Operator</strong></p><p>Ladies and gentlemen, thank you for standing by, and welcome to the Zscaler fiscal fourth quarter and full-year 2020 earnings conference call. [Operator instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded.</p> <p>[Operator instructions]I would now like to hand the conference over to Mr. Bill Choi, senior vice president of investor relations. Thank you. Please go ahead, sir.</p><p><strong>Bill Choi</strong> -- <em>Senior Vice President of Investor Relations</em></p> <p>Good afternoon, everyone, and welcome to the Zscaler fiscal fourth quarter and full-year 2020 earnings conference call. On the call with me today are, Jay Chaudhry, chairman and CEO; and Remo Canessa, CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis.</p> <p>You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release. For historical periods, the GAAP to the non-GAAP reconciliations can be found in the supplemental financial information. Starting in fiscal '21, we will be excluding stock-based compensation-related payroll taxes from our non-GAAP results. We have provided a separate table in the supplemental schedule with historical data for the last eight quarters.I'd like to remind you that today's discussion will contain forward-looking statements, including but not limited to the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, remaining performance obligations, income taxes, and earnings per share.</p><p></p><div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zscaler</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZscaler%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=580ec7eb-8b18-4b8d-8dd9-e84a2ca2765b">ten best stocks</a></strong> for investors to buy right now… and Zscaler wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZscaler%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=580ec7eb-8b18-4b8d-8dd9-e84a2ca2765b" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div><p>These statements and other comments are not guarantees of future performance but rather are subject to risk and uncertainty, some of which are beyond our control, including but not limited to the duration and impact of COVID-19 on our business, the global economy, and the respective businesses of our customers, vendors, and partners. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC, as well as in today's earnings release.</p> <p>I would also like to inform you that management will be attending the following upcoming virtual investor conferences: Citi Global Technology Conference tomorrow, Deutsche Bank Technology Conference on September 15, Morningstar Management Behind the Moat Conference on September 29. Presentations for these events will be webcast and the links will be available on our investor relations website. Now, I'll turn the call over to Jay. </p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Thank you, Bill, and thank you for joining us. I hope all of you and your families are staying healthy and safe. With the ongoing pandemic, I would like to acknowledge the tireless efforts of our team and partners who are committed to our customer success. I'm pleased to report our strong results for the fiscal fourth quarter and the full-year 2020 with exceptional growth in both new customer and upsell business.</p> <p>In Q4, we delivered growth of 46% in revenue and 55% in billings, reflecting the increased momentum in our business as our customers accelerate the digital transformation, despite the macroeconomic challenges. We offer customers a cloud-native platform which we call the Zscaler Zero Trust Exchange securely connecting users to applications or applications to applications in a borderless and hyperconnected digital world. In the new work-from-anywhere economy, where applications are moving to the cloud and users are outside the corporate network, traditional network and network security have become irrelevant. We ensure that businesses can operate at any scale with users anywhere in the world on any device independent of the network.</p> <p>We are helping our customers move from legacy network security to zero trust security, which reduces business risk and makes businesses agile and competitive. As I reflect on the past 12 months, culminating in our strong Q4 performance, I view fiscal '20 as a pivotal year in which we made tremendous progress on a number of strategic fronts to position us well for long-term growth. Zscaler has never been stronger, and I believe we have an incredible opportunity in front of us. Let me highlight three pillars of our strategy: our platform, our products, and our go-to-market.</p> <p>To start with our platform, Zscaler stands for Zenith of Scalability. True to our name, our platform continues to scale to new heights. Zscaler Zero Trust Exchange is the largest in-line cloud security platform in the world, and we are processing more than 120 billion transactions and blocking more than 100 million threats per day from users across 185 countries. This large dataset feeds our machine learning and AI engines for superior threat protection, better detection of user and application traffic anomalies, and faster resolution of performance bottlenecks.</p> <p>All this happens on a platform that uses 70% renewable energy today with a goal to use over 90%. Deployed across more than 150 data centers, our Zero Trust Exchange platform was built from the ground-up to fully deliver the promise of Gartner's Secure Access Service Edge or SASE framework. Traditional network security vendors are trying to co-opt our vision of cloud security after rejecting it for years. They're trying to retrofit the legacy appliances into a cloud world.</p> <p>But just like you can't create Netflix by stacking thousands of DVD players in the cloud, you can't offer an in-line, high-performance security cloud by spinning up bunch of virtual firewalls in a public cloud. To put it simply, having the right cloud-native architecture creates a significant barrier to entry cloud imitators. Building a cloud-native architecture with full security and minimal latency was a daunting challenge and running a massive in-line distributed cloud with five nines of availability is, in order of magnitude, more difficult. For large enterprises, who want network and security modernization, we believe we are the only cloud-native multi-tenant platform that meets their needs.</p> <p>We ended fiscal '20 with over 4,500 customers, including over 150 of the Fortune 500 and over 450 of the Global 2000 companies. We have over 100 customers that generate over $1 million in ARR, or annual recurring revenue. While the average NPS or net promoter score of an average hash company is 30, Zscaler's NPS is 76, which is 2.5 times higher, a proof of the value that Zscaler delivers. Next, on product innovation.</p> <p>This has been an exceptionally productive year for our engineering and product teams. We through internal innovation and highly targeted acquisitions, we have significantly increased the number of products available on our platform, further expanding our already substantial technology lead. During the year, we expanded the number of solutions from two to four, plus a flagship ZIA solution expanded with two new products, out-of-band CASB and Cloud Browser Isolation, which, together with our in-line CASB and advanced DLP, expanded our addressable market for data protection. Second, our ZPA solution which doubles our market opportunity has become the most mature zero trust solution with deep and wide functionality, including support for web and non-web applications.</p> <p>With deployment at a massive scale with over 150 Global 2000 customers, ZPA has become the market leader for zero-trust security. Third, with the Zscaler platform uniquely sitting between the user and application, our Zscaler Digital Experience or ZDX solution computes a performance score measuring the digital experience of every user and application helping customers to pinpoint and resolve performance issues further expanding our addressable market. Lastly, our next opportunity is to expand our Zero Trust Exchange to protect applications and data in public or private clouds. With our CSBM product, we can identify and remediate misconfigurations of cloud workloads, providing superior data protection.</p> <p>Our workload segmentation service implements a zero-trust architecture for app-to-app communication, where apps may be running on containers or virtual machines. This is a far superior approach for app segmentation without having to do network-based segmentation. What sets us apart from the many vendors who claim to have a platform is the following. Our platform is purpose-built for the cloud.</p> <p>It is designed to be extensible to integrate with our targeted acquisitions, as well as with third-party products. Legacy network security vendors can't create a cloud platform by cobbling together a bunch of acquired companies. History has shown that this approach does not work. Moving on to the third pillar: go-to-market.</p> <p>We further refined our metric-driven repeatable sales process, which is giving us deep visibility into our business and a strong and growing pipeline. We invested heavily this year to build our sales machine that we believe can demonstrate our compelling value to enterprises, drive larger deals and deliver consistent sales execution to take Zscaler beyond a $1 billion in annual revenue. Let me highlight a few of the go-to-market accomplishments. We significantly expanded our sales leadership by adding extra depth in our regional management.</p> <p>The build-out of our sales leadership is largely complete. We had another record quarter of hiring and exceeded our year-end target of 60% year-over-year increase in quota-carrying field reps. Even with the significant growth, our sales productivity was up for the year exceeding our expectations. Since we launched our Summit Partner Program, we recruited additional cloud-focused channel partners to drive further sales leverage.</p> <p>We are pleased to see increasing wins and larger deal size with our Summit Partners. I am extremely proud of our go-to-market team and how we executed our sales strategy this year. Now, let me provide some business highlights for the fourth quarter. Our ZIA business is accelerating due to our customers focus on work from anywhere.</p> <p>When employees are allowed to directly access SaaS applications and the Internet from their homes, security becomes a major risk and they need ZIA. We continue to see the increased adoption of our high-end Transformation Bundle, which includes cloud firewall and sandbox. At the end of fiscal '20, 49% of our ZIA annual recurring revenue is coming from the Transformation Bundle compared to 43% last year. Let me share two ZIA deals in the quarter that show our accelerated momentum with the financial services customers.</p> <p>A new customer initially engaged us to secure SD-WAN for 120 offices. They shifted the focus from SD-WAN to securing 40,000 employees in their homes as a result of the pandemic with sensitive financial data at risk. Security was a major requirement and only a proxy architecture was considered. This customer purchased the entire ZIA portfolio, including CASB, advanced DLP, and CSBM for Microsoft Office 365.</p> <p>Our integrated CASB offering replaced our CASB point product that by itself required three on-site engineers and a seven-figure annual spend. Our superior security at a very attractive ROI resonated with both the CIO and the CFO. In a ZIA upsell and other financial services company that has been a customer since 2018 merged with a peer and more than double the purchase of Business Bundle plus DLP to protect all 70,000 employees. Like the prior example, this customer only considered a proxy architecture.</p> <p>They standardize on our platform and consolidated three vendors, streamlining their operations and reducing their costs. Our product integration with Microsoft and CrowdStrike was an important consideration. Next, I would like to highlight ZPA. We continue to have strong adoption of ZPA, which is benefiting work from anywhere and applications migrating to the cloud.</p> <p>ZPA is more than a VPN replacement. It is an architectural shift to zero trust access for private applications in a multi-cloud environment. ZPA contributed 29% of our new and upsell business in fiscal '20 compared to 14% in the prior year. In the quarter, we closed our largest deal for ZPA with a longtime customer.</p> <p>This Global 100 conglomerate had already purchased the entire ZIA portfolio for all employees and, with the COVID pandemic, accelerated its transformation journey by purchasing ZPA for 300,000 employees. With resounding success with ZIA and significant trust in Zscaler, they deployed ZPA globally in just a couple of weeks as the world battled the spread of COVID. While the immediate objective for this deal was to eliminate legacy VPN, ZPA was selected to implement zero-trust security by establishing an application-level policy where you connect users to specific apps, not to a network. ZPA is providing secure access to over half a million unique applications and as a proof point of its maturity and scalability.</p> <p>Next, one of the world's largest IT services company with headquarters in Asia purchased ZPA for all 180,000 employees. This customer was using virtual firewalls and VPNs to protect their applications in the public cloud. They viewed each Internet-facing firewall or VPN as an attack surface that they wanted to eliminate. With the ZPA rollout, the customer reduced Internet exposure for hundreds of applications down to a handful in less than four weeks, greatly reducing business risk.</p> <p>Legacy vendors try to sell their cloud-based VPN but failed to meet the requirement for zero attack surface. I'm delighted to share that more customers are buying ZIA and ZPA together, which enables a true transformation with direct access to any application over any network. For example, a global professional services company purchased our Transformation Bundle plus DLP for 50,000 users and ZPA for 20,000 users. The business involves handling sensitive customer information, hence they needed inspection of all traffic including SSL for comprehensive data protection.</p> <p>The incumbent firewall vendor tried to sell its cloud-based offering but was disqualified as they could not meet the SSL inspection and DLP requirements. Our zero-trust approach will also help the customer to quickly integrate future M&A, a core growth strategy for this company. And lastly, in another new logo deal, a federal civilian agency purchased ZIA Business Bundle with cloud firewall plus DLP and ZPA for 21,000 users. When the pandemic started, the agency relied on legacy VPN technology which could not scale and resulted in poor user experience.</p> <p>While the immediate use case was VPN replacement, this agency acquired ZIA and ZPA together to transform its network and security with our FedRAMP authorized cloud platform. This win was notably our largest federal deal to date and we're building considerable momentum in the US federal market. With the highest levels of FedRAMP certifications of both ZIA and ZPA, which involves a rigorous process, we are positioned very well in this large market and we are proud to help our government customers do their critical work in these trying times. Let me touch on a couple of new products that are starting to contribute to deal wins.</p> <p>Our out-of-band CASB has become very comprehensive, helping us displace CASB point products and increase our deal size, as I indicated in the deal highlights. We are also starting to see early success with ZDX including wins with the European consumer products company and a US-based pharmaceutical company. While currently very small, we believe our new products create a significant growth opportunity. As we start the new fiscal year, we are in a fortunate position to be able to help our customers pursue digital transformation, their highest IT priority.</p> <p>With the mindset change and openness to transformation, I have seen an increase in CIO-level awareness and engagement with us. The inbound customer requests have greatly increased, and we're becoming a part of bigger Transformation projects and a key partner to consolidate point products, remove complexity, and save costs. We are excited about our mission to make the cloud safe for business and enjoyable for users. Now, I would like to turn over the call to Remo for our financial results.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>Thank you, Jay. As mentioned, we are pleased with the results for the fourth quarter and the full-year 2020. Revenue for the quarter was $125.9 million, up 14% sequentially and 46% year over year. ZPA revenue was 12% of total revenue in the quarter.</p> <p>From a geographic perspective, for the quarter, Americas represented 50% of revenue, EMEA was 40%, and APJ was 10%. For the full year, revenue was $431.3 million, up 42% year over year. Turning to calculated billings, which we define as the changed deferred revenue for the quarter plus total revenue recognized in that quarter, billings grew 55% year over year to $194.9 million. As a reminder, our contract terms are typically one to three years, we primarily invoice our customers one year in advance.</p> <p>Remaining performance obligations or RPO, which represents our total committed non-cancelable future revenue was $783 million on July 31, up 41% from one year ago. The current RPO is 55% of the total RPO. ZPA was 29% of total new and upsell business in fiscal '20 compared to 14% in the prior year. We are seeing a higher attach rate of ZPA both in the number of deals and the number of seats per deal.</p> <p>We see a good mix of ZPA opportunities between new and existing customers. We have a large upsell opportunity as only 35% of our 450 Global 2000 customers have purchased ZPA. Our strong customer retention and ability upsell have resulted in a consistently high dollar-based net retention rate, which is 120% for the quarter compared to 118% a year ago and 119% last quarter. As we have highlighted, this metric will vary quarter to quarter.</p> <p>While good for our business, our increased success selling bigger Transformation Bundles selling both ZIA and ZPA from the start and faster upsells within a year can reduce our dollar-based net retention rate in the future. Considering these factors, we feel that 120% is outstanding.Total gross margin was 78% down 2 percentage points sequentially and 3 percentage points year over year. The decline is primarily due to ZPA traffic growing over 10 times since February. The augmented use of AWS and Azure to meet the surge in demand, which point out a significantly higher cost compared to our data centers.</p> <p>The gross margin was better than our guidance of 76% to 77% as we made solid progress on migrating more of the ZPA traffic to our data centers during the quarter. As we mentioned previously, our combined gross margins of our core products ZIA and ZPA are expected to return to 80% in the second half of fiscal 2021. However, most of our new emerging products, which include ZDX, workload segmentation, and CSBM will be running in the public cloud until we scale them into our own data centers in the future, while in the public cloud, these products will have lower gross margins than our core products. As a result, we expect total corporate gross margins to be 78%, 79% in fiscal 2021.</p> <p>Turning to operating expenses, our total operating expenses increased 14% sequentially and 46% year over year to $90.7 million, was flat year over year as a percentage of revenue at 72%. Operating expenses in Q4 includes approximately $2.9 million of expenses associated with the Cloudneeti and Edgewise acquisitions. Sales and marketing increased 14% sequentially and 46% year over year to $59.7 million. The year-over-year increase is due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E.</p> <p>We've been very successful in hiring and onboarding remotely. We exceeded our goal of increase in our field rep headcount by 60% for the full year. R&D was up 19% sequentially and up 54% year over year to $20.3 million. The increase was primarily due to continued investments in our team.</p> <p>G&A increased 8% sequentially and 33% year over year to $10.7 million. The growth in G&A includes investments in building our teams, compensation-related expenses, and professional fees including acquisition-related expenses. Our fourth-quarter operating margin was 6%, which compares to 9% in the same quarter last year. Net income in the quarter was $7 million or non-GAAP earnings per share of $0.05.</p> <p>We ended the quarter with over $1.3 billion in cash, cash equivalents, and short-term investments including net cash of approximately $1 billion raise for the June offering of convertible senior notes due in 2025. Free cash flow was positive $11 million in the quarter. Now, moving on to guidance. As a reminder, these numbers are all non-GAAP which excludes stock-based compensation expenses.</p> <p>Amortization of debt discount, amortization of intangible assets, facility exit costs, and any associated tax effects. As Bill indicated earlier, starting in fiscal 2021, we will also be excluding stock-based compensation related to payroll taxes from our non-GAAP results. For the first quarter of fiscal 2021, we expect revenue in the range of $131 million to $133 million, reflecting a year-over-year growth of 40% to 42%; operating profit in the range of $8 million to $10 million; other income of $500,000 net of interest payments on the senior convertible notes; income taxes of $1.25 million; and earnings per share of approximately $0.05 to $0.06, assuming 143 million common shares outstanding. For the full-year fiscal '21, we expect revenue in the range of $580 million to $590 million or year-over-year growth of 34% to 37%, calculated billings in the range of $710 million to $720 million or year-over-year growth of 29% to 31%.</p> <p>Over the last five years, first-half billings have represented on average 43% to 44% of full-year billings. We would expect a similar distribution in fiscal 2021. Operating profit in the range of $44 million to $46 million; other income of $2 million; income taxes of $5 million; and earnings per share in the range of $0.28 to $0.30, assuming approximately 145 million common shares outstanding. Our guidance reflects the increased investments in our business, driven by two major developments.</p> <p>One COVID-19 is accelerating digital transformation, which is the market Zscaler was created to serve. We feel we have momentum based on our performance and we see the market coming to us. Our plans are to continue to invest aggressively in sales and marketing behind the growth in our business. Two, our pursuit of additional market opportunities with our new products that Jay reviewed earlier.</p> <p>As I've indicated, the acquisitions of Cloudneeti and Edgewise are expected to have an immaterial impact on revenue in fiscal '21 while adding approximately $12 million to $14 million in operating expenses. In addition, we will increase investments in our technology platform and cloud infrastructure. Given our accelerated investments this year, we would like to provide an update to our long-term financial model. We expect to achieve 20% to 22% operating margin for the full year and fiscal '24.</p> <p>While we will balance growth and profitability, growth will take priority considering our significant market opportunity. We are confident of reaching our target operating model within the next four years. Now, I'd like to hand the call back over to Jay.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Thank you, Remo. We believe we are in the early innings of a significant market opportunity to secure digital transformation. Just like Salesforce and Workday developed cloud-native multi-tenant platforms to disrupt large legacy software vendors, Zscaler has a similar opportunity to disrupt network security. With multiple tailwinds such as SaaS adoption, work-from-anywhere, and app migration to public clouds, we believe the market is coming to us.</p> <p>The value proposition of our zero-trust platform is resonating with customers. Our next big opportunity is to expand into securing app-to-app communication in the cloud, as well as monitoring end-to-end digital experience. As we demonstrated in recent quarters, we are delivering world-class sales execution and we believe we are positioned for long-term growth. We thank you for your interest in Zscaler and look forward to reporting our progress in the future.</p> <p>Operator, you may now open the call for questions.</p> <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-15681">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-15681');\n });\n </script>\n</div>\n</div><h2>Questions & Answers:</h2><br/> <p><strong>Operator</strong></p><p>[Operator instructions] Our first question comes from Walter Pritchard with Citi. Your line is now open.</p><p><strong>Walter Pritchard</strong> -- <em>Citi -- Analyst</em></p> <p>Hi. Thanks. I'm wondering if you could juxtapose the guidance for billings next year around 30% with the capacity growth you had in sales, which I think is about double that. Obviously, there's some puts and takes around productive reps and so forth.</p> <p>But how should we think about those two things together? And you had productivity increase this year, I think you said in the script. Just wanted to make sure we're thinking about those together or any things that drives the disparity.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. Hi, Walter. I think you've known me for a long time. Related to how we do guidance, we like to be prudent.</p> <p>Related to, as Jay mentioned on the call, we planned initially for fiscal '20 that our sales productivity will be down. When you consider that we're able to increase our field quota sales reps by 60%, primarily in the second half, for us to be higher sales productivity in fiscal '20 I think speaks volumes related to the go-to-market and the team we have in the sales organization, as well as the market coming to us. As we go forward into fiscal '21, just some clarity. The key thing to remember is that we see the market coming to us.</p> <p>Everything points that basically the market is coming to us from pipeline growth, new customer meetings, new customer growth, and just the employees are bringing onboard, deal sizes, consolidation going on, all the things, everything we're looking at basically points to that growth. So what we're doing basically is we're going to invest in the growth of the company. From an operating profitability perspective, it is easy to get to on a SaaS model's operating profitability quicker, all you got to do is slow things down because of the contribution margin in years two and three. Jay and I have said from the start, if we see this market coming to us, we're going to step on the gas and we are seeing the market coming to us, we're stepping on the gas and we're going to significantly increase our investments across the board in the company, in particular, in sales and marketing -- continued sales and marketing, R&D and also our cloud operations and delivery of our platform.</p><p><strong>Walter Pritchard</strong> -- <em>Citi -- Analyst</em></p> <p>Thank you.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.</p><p><strong>Matt Hedberg</strong> -- <em>RBC Capital Markets -- Analyst</em></p> <p>Hi. Thanks for taking my question, guys. Congrats on the quarter. Jay, digital transformations are clearly accelerating post-COVID.</p> <p>And I'm wondering, though, as you talk to executives, are a lot of them thinking that, in fact, security transformations has to happen first? In other words, is that a precursor to digital transformation and is that what's also sort of leading to what I would assume is record pipelines here exiting the year?</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>That's correct, Matt. Thank you. So if you think of digital transformation, it has three pieces to it. Everything starts with application transformation, modernization because people need to access applications maybe business application, collaborations alike.</p> <p>And since this new economy, you can't be sitting on the network in your branch offices or wherever you end up working from anywhere and wherever, so you must be secure. So security becomes an important enabler of this transformation journey. In fact, I would say that security comes first before any of the network transformation or SD-WAN comes in because, without proper cloud-centric security, it can't be done. That's why we are seeing the acceleration in our business.</p> <p>That's why when people say, gee, after COVID, are things going to slow down, I say no, we are seeing actually acceleration in our business not because of a one-time event but because of accelerating trend. More and more CIOs, CCOs are talking to us. The other thing I would mention is our business is not driven by just CCOs. No.</p> <p>1 buyer of Zscaler or No. 1 sponsor of Zscaler transformation is CIO and then CTO and CCO come along with that.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Alex Henderson with Needham. Your line is now open.</p><p><strong>Alex Henderson</strong> -- <em>Needham and Company -- Analyst</em></p> <p>Thanks. Just one technical question and then one on the technology side. Can you talk about whether you expect to continue to expand your sales capacity at a pace faster than sales in your '21 guidance? And then second piece on the technology front, I'm really fascinated by your commentary around the modern application protection domain-to-domain, app-to-app environments. Can you talk a little bit about how you penetrate into the Kubernetes orchestration environments tie into Jenkins and CI/CD processing? And does that put you in conflict with some of the CDN players or are you more a partner with them? Thanks.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>I'll take the first question, Alex. The answer is yes, we are increasing sales capacity significantly in fiscal '21. The sales capacity increase -- we took a bet last year about increasing sales capacity, and it was the right bet. And basically, the increased sales capacity puts us in good position going into fiscal '21.</p> <p>Much of that sales capacity in fiscal '20 basically coming onto second half will have a positive impact in the second half of our fiscal '21. Related to going into fiscal '22, we're trying to increase our sales capacity and trying to front-end load that sales capacity, increase it. As we go forward, we're going to monitor how the business is going. But as I mentioned before, all indicators are just very, very positive.</p> <p>The sales productivity, as I mentioned, that we exceeded our sales productivity, being above the prior year where we thought would be below, it just speaks to what we put in place. One of the key things, I mean, when you think about Zscaler if you think about a company that built the platform for today and the future, we're talking about a market that basically we knew was there but wasn't coming to us as fast as we thought it would. It's now coming to us because of basically the external factors which are hitting the world. And then the missing piece basically is the go-to-market.</p> <p>We feel we've got, if not the world's best sales machine, one of the world's best sales machines with the leadership that we have in our sales organizations and the investments that we made in that in fiscal '20 and we'll continue to make into fiscal '21. Having said that, basically, the foundation is in place. That foundation in the go-to-market was built in fiscal '20. Now, we're going to add to it.</p> <p>We'll monitor it. If we see things as we're hoping to, we'll continue to expand.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>And, Alex, this is Jay. Second part of your question is application protection in public cloud. We are seeing lots and lots of dynamic workflows being launched in public cloud. This security has to be done.</p> <p>Different vendors try to look at it different ways. Legacy vendors try to take a legacy approach to it, for example. Firewall guys will say, let me try to create network segmentation. CDN guys are trying to say, gee, I'm a CDN vendor, can I build a WAN around it and alike? We come from the fact that, in this new world, there is no such thing as traditional security.</p> <p>We are the exchange with a switchboard. We connect the right user to right applications. We are extending the same concept to say, we will securely connect right application to right application to right process to the right process. And that's using core of our ZPA technology combined with the acquisition we did of a company called Edgewise Networks.</p> <p>So it's a nascent new market. It's a disruption opportunity. We think we can do the same thing in a public cloud as we had done for ZIA and ZPA type of technologies.</p><p><strong>Alex Henderson</strong> -- <em>Needham and Company -- Analyst</em></p> <p>Thank you.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Andrew Nowinski with D.A. Davidson. Your line is now open.</p><p><strong>Andrew Nowinski</strong> -- <em>D.A. Davidson -- Analyst</em></p> <p>Hey, great. Thank you very much, gentlemen, and congrats on the great quarter. I just want to ask more of a competition-related question. Cisco acquired a company called ThousandEyes recently and which I believe is a technology aimed at providing more network visibility similar to ZDX.</p> <p>So I'm wondering if you're seeing any more competition from Cisco in the zero-trust market. And then also, could you also provide any feedback on your win rates versus Palo Alto? Thanks.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Yeah. let me start with this, your first question about network visibility vendors. It is true that a lot of vendors that are doing network monitoring and the network that monitored was typically the wide-area network, the private network. We don't do any of that.</p> <p>We believe that Internet is the new network. So we are not focused on network itself. We are focused on end-to-end monitoring and performance of the user from user to the application. The network is a piece of it, application is a piece of it, and end-user device may be a piece of it.</p> <p>Even though network performance is an old market, app performance is an old market, the market we are going after is a relatively new market because of work from anywhere. That's number one. Number two, this part doesn't really have much to do with zero trust. This is about performance.</p> <p>Your question was, are we seeing zero trust competition from other large vendors? Zero trust can't be done by cobbling things on top of network security, if you're doing network security don't do zero trust because zero trust means not securing the network because assuming that you basically — you can't be trusted to be on the networks, so that's the second part. The third part is -- I think you mentioned competition from firewall company, I think. So we think -- look, if you think what a zero-trust -- we say we securely connect an entity to another entity, a user to an application without putting them on the network. Network is merely transport for us.</p> <p>All network security companies including firewalls, they're trying to secure the network. Our architecture is totally opposite to other architecture. So while we see them on some of the lower accounts when it comes to large enterprises, they are very savvy, they understand zero trust, they understand security, they understand proxy architecture. And as I highlighted in a few of my -- in my prepared remarks on some of the customer wins, firewalls are generally ruled out at the upfront, even if they try to go in there because proxy architecture becomes a requirement to do proper security, including SSL inspection.</p><p><strong>Andrew Nowinski</strong> -- <em>D.A. Davidson -- Analyst</em></p> <p>OK, great. Thanks, Jay. Keep up the good work.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Brad Zelnick with Credit Suisse. Your line is now open.</p><p><strong>Brad Zelnick</strong> -- <em>Credit Suisse -- Analyst</em></p> <p>Great. Congratulations, guys. A real, real strong finish to unbelievable year, and it's great to see. Remo, I wanted to drill in on the update that you provided on the long-term model.</p> <p>So you've told us now you've put a timeline to when you'd be at 20% to 22% operating margins four years out. And if I'm not mistaken, I recall that around the time of the IPO, you had thought that the company would be at $800 million to a $1 billion in revenue at the time that you would hit that goal. And I just wanted to go back and think about -- if I try to back-of-the-envelope model out to '24 and we assume natural deceleration over time, is it fair that at that point, you would be growing the business maybe somewhere in the high teens or low 20s? Do you think about it that way and as well how should we think about the slope of that margin expansion over time on the way to the 20% to 22%? Thank you.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>Brad, lot of great questions in that. We've got several questions. The key thing is that the world changed. The world changed from the time we went public.</p> <p>And then what's happened basically we're seeing an acceleration in our business, as I talked about before. The two things that we're seeing the acceleration. One is very apparent, which is basically COVID-19. I mean, it's basically accelerating transformation.</p> <p>It is the market that we're built for. So that's one thing that's going on. The second thing basically with our emerging products. We have a significant additional TAM in our user experience product and also workload segmentation and what we've decided is that to refine the 20%, 22% profit target and we're seeing for the full-year fiscal '24 versus the dollar amount which we provided before.</p> <p>What we've also said basically is that and you know the model, I mean, you know the SaaS model, we can slow this thing down and get there like next year if we want to. Is that the right thing to do for the shareholders? With this market opportunity that we have, it is absolutely not. So, therefore, from — and Jay and I've had long discussions about this. Jay and I, we met four years ago.</p> <p>I mean, there's not much that's changed. We basically are on the same page. I took this job to build a great company, right. I took this job because of my respect for Jay and because we're on the same page.</p> <p>We're trying to build a very meaningful and significant company and we feel we have that opportunity, more so now than before because of the changes in the world. We will put growth ahead of profitability, but we're putting the end zone is basically the goal post because where we're at right now for our projections for fiscal '21 and where we are going to be for the full-year fiscal '24. What growth rates? I can't tell you. How are things going to play out? I can't tell you.</p> <p>What I can tell you is we can get there. We can get there no matter how this market goes or with the product platform that we have that we started out with the ZIA, then we expanded to ZPA and you take a look at the growth in ZPA that we've had, it's been pretty significant. Now, you're adding the ZDX, the user experience, which we think is a significant market, as I mentioned. You're putting on board the workload segmentation and then you have the ability to bringing other products like CASB out-of-band, the Browser Isolation, B2B, CSBM.</p> <p>We have the ability to deliver these products because we've built the platform in order to deliver these products. So am I confident we're going to get to our operating profitability in four years? I am. What is the growth going to be? I cannot tell you. But I can tell you that I'm very — based on what we're seeing, based on the market potential, based on the team that we have in place, I feel very good.</p><p><strong>Brad Zelnick</strong> -- <em>Credit Suisse -- Analyst</em></p> <p>OK. Thank you. That's it for me.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Keith Bachman with BMO. Your line is now open.</p><p><strong>Keith Bachman</strong> -- <em>BMO Capital Markets -- Analyst</em></p> <p>Hi. Thank you very much for taking the question. I wanted to ask a little bit about growth drivers and just to pick up on what you just mentioned is -- you talk about the world's changed, and it would seem to be that, in a COVID economy, the solution ZPA is getting a much more welcomed reception. To speak in other words, it seems like it's been a catalyst to growth.</p> <p>And you mentioned that only 35% of your installed base was purchased. When you think about the guidance you gave for '21, how are you thinking about the growth of ZPA within that context? And really, what I'm asking is any color you could give us on the distribution. But isn't that ZPA now being a help in terms of opening up new accounts, as well as just selling into the installed base of ZIA, so to speak? But if you could just give us a little color on how we should be thinking about the growth rate in '21. And is it, in fact, opening new doors for you as a stand-alone? Thank you.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>I'll take a crack then let Jay talk or speak. Yes. The answer is yes. I mean, ZPA was at 43% of our business total new and upsell business in Q3.</p> <p>ZPA for the year is 29%, and it was around 28%, 29% for Q4. I look at the dollar amount of ZPA in Q3, Q4. It's pretty comparable. The question that came up on the last call is, what's going on with ZIA? I mean, is ZIA going to fall off the cliff? Well, it happened.</p> <p>It was a record quarter. It was a record quarter for ZIA in Q4. The question came up last call was more of your existing customers are buying basically, and that's ZPA driven by COVID. And percentages were, I think, 60% upsell, 40% new.</p> <p>We said that our pipeline indicated that we'd be closer to our historical rates of 50% new or 60% new. We're pretty much 50-50. The pipeline that we have going forward related to ZIA and ZPA, I think it depends on close rates, but it's healthy. It is showing the ZPA has a lot of traction still.</p> <p>The key thing, though, when you take a look at the contribution of ZIA and ZPA, what I want to draw your attention to is that Zscaler is a platform. That platform as we talked about, ZDX and workload segmentation and the other products that I've talked about, as we go forward, customers have a need related to securing their networks for the 21st century. Zscaler was built for the 21st century. Zscaler is right in the center of what these companies need.</p> <p>We need to go out there and tell companies what we have so they understand that their lives can be a lot better. So when you think about us going forward, think about Zscaler as a platform play with the ability to add additional applications relatively quickly to really service our customers to properly secure them, both in a workload environment, as well as going in a user environment.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Yeah. That's great, Remo. I would say many times, people think of COVID means ZPA. No, work-from-anywhere means ZIA and ZPA, both combined, and there is big potential for both of them.</p><p><strong>Keith Bachman</strong> -- <em>BMO Capital Markets -- Analyst</em></p> <p>OK. Thanks, gentlemen.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Daniel Bartus with Bank of America. Your line is now open.</p><p><strong>Daniel Bartus</strong> -- <em>Bank of America Merrill Lynch -- Analyst</em></p> <p>Hey, guys. Thanks a lot for taking the question. I wanted to ask about new products, specifically ZDX and Z B2B. So first, Jay, can you just talk about customer interest at this time maybe compared to the early years for ZPA? And then, Remo, just curious what you have baked into your fiscal '21 assumptions for these products or new products in general.</p> <p>Thanks.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Yes. So let me start with the two new products you talked about, ZDX, which is digital experience. When you see Orleans and Sydney connects to Office 365, things slow. There's not a single product in the market that helps IT figure out where the issues are.</p> <p>That's a big hole we are filling. So there's a pretty high demand for ZDX and we just got the product out last quarter and we're seeing a good pipeline, lots of interest, and we are evolving the product pretty rapidly. B2B is actually a little bit interesting angle, big sizable opportunity but different kind of products, a little bit different buyer. It's the chief digital officer who is building new B2B applications.</p> <p>They are interested in it. So we're seeing a lot of interest, but we see lot more evangelism needed on the B2B side than on the ZDX side. But good growing pipeline in both areas, good interest, shorter sales cycle on ZDX, longer sales cycle on B2B. But both help us because the part of a proper platform.</p> <p>All these things aren't bought piece at a time. They become extension to the platform our customer has bought because customers are trying to buy best-of-breed platform rather than best-of-breed products.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>On the financial side, the revenue is basically immaterial because they're ratable. And for the new business, new ACV, I would say the mid-single-digit type range for all the products combined similar-type trajectory that we had for ZPA, where we went to 24% and then up to 10%. More in that single-digit type range is probably best baked into the plan.</p><p><strong>Daniel Bartus</strong> -- <em>Bank of America Merrill Lynch -- Analyst</em></p> <p>Got it. Thanks, guys.</p><p><strong>Operator</strong></p><p>Thank you. And our next question comes from Brian Essex with Goldman Sachs. Your line is now open.</p><p><strong>Brian Essex</strong> -- <em>Goldman Sachs -- Analyst</em></p> <p>Hi. Good afternoon and thank you for taking the question. Jay, I had a question for you, maybe to pivot off of Keith's question. It seems as though last quarter, there was a lot of -- I don't want to call it panic buying but a lot of enterprise purchases that maybe they didn't have enough time to assess a new enterprise architecture.</p> <p>And it sounds like you have a more — and I think that naturally led to higher ZPA attach rates. It sounds like growth is more balanced now. Could you maybe talk about strategically what you're seeing with customers? Do they now have time to reassess their network architecture? And are those leading to larger deals and more new customers added onto the platform? Maybe you can just give us a little bit of color in terms of what you're seeing. That'd be real helpful.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Yeah. Two points that you mentioned there. One is the assessment to do the right architecture. Two is are their decisions driven by some of the cost, complexity-driven.</p> <p>The answer is yes to both of those things. It is very true that a lot of people who actually were familiar and exposed to Zscaler and in fact, some of them are already testing it, they bought ZPA pretty quickly because they knew us already. We also saw a number of ZIA, ZPA combined deals in Q3. The acceleration of combined ZIA and ZPA deal together has further increased.</p> <p>We like that. But also, what we are planning is a number of customers we're talking to now or I would say, prospects we're talking to now are saying, yes, we bought a bunch of VPNs of whatever or BDIs for a short-term need to be met. But we know we want to go to zero trust. We need this digital transformation.</p> <p>So evaluation of Zscaler ZIA and ZPAs aren't driven by some of those needs not for the short term but for architectural transformation. The second big trend we are seeing is that because of macroeconomic pressures, every CIO and more and more CFOs are trying to figure out how to do cost consolidation and simplification. So now, they're beginning to buy more and more bigger platform bundles than smaller bundles, that has led to our increase of Transformation Bundle on the ZIA side but also combination of ZIA, ZPA together on other side. So we have benefited and formed consolidation, simplification, reduction of complexity as well.</p> <p>We think it's a good trend that market needs to do for making their business more agile, more competitive.</p><p><strong>Brian Essex</strong> -- <em>Goldman Sachs -- Analyst</em></p> <p>That's great color. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Patrick Colville with Deutsche Bank. Your line is now open.</p><p><strong>Patrick Colville</strong> -- <em>Deutsche Bank -- Analyst</em></p> <p>Thank you for taking my question and congrats on a very impressive set of results. Can I just talk about the sales hiring in 2020? That was pretty one of the biggest things we saw with you guys increase in sales headcount by a net 60% in hindsight, very astute decision. Can we just think about 2021? If you can give us any metrics around, I guess, the headcount of hiring, would be great, and a net amount, that would be awesome, just how to think about the momentum there and I guess how you see that trending.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. We're not going to give you as much color as we did last time. What I can say though to give you some perspective, we do expect to increase the number of heads that we increased fiscal '20 in our field sales organization substantially. So we are -- as I mentioned, we see the market coming to us.</p> <p>We're going to do what we feel are the right things for the business. We are going to aggressively hire. That aggressive hiring has already started and that aggressive hiring we're finding is to basically, I think there is an increased awareness related to the value proposition that Zscaler has. And I think that we are attracting some very high-quality people.</p> <p>But the total amount, the numeric amount will be substantially higher in fiscal '21 than fiscal '22 — or fiscal '20 that we hired.</p><p><strong>Patrick Colville</strong> -- <em>Deutsche Bank -- Analyst</em></p> <p>OK. That's great. Thank you.</p><p><strong>Operator</strong></p><p>Thank you. Our next question comes from Jonathan Ruykhaver with Baird. Your line is now open.</p><p><strong>Jonathan Ruykhaver</strong> -- <em>Baird -- Analyst</em></p> <p>Yeah. Thank you. Good afternoon. Jay, I'm wondering if you could provide some more color on the initiatives that have been put into place with the new Summit Partner Program, specifically just what kind of reception are you seeing.</p> <p>And has there been any impact yet to the channel sales velocity?</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>Yes. Very good question. I briefly mentioned in my prepared remarks, but Summit Partner was put in place to identify cloud-focused or cloud-borne partners who could help customers with transformation. So it's actually very well aligned with how our sales are done.</p> <p>So we are seeing increased number of deal registrations. We are also seeing the deal size growing because of the way this transformation sale is happening, and we think we expect to get more and more leverage in fiscal '21 from these partners. So I would say very bullish on the progress we made and expecting even better results in this fiscal year.</p><p><strong>Jonathan Ruykhaver</strong> -- <em>Baird -- Analyst</em></p> <p>That's great. Thanks for the color.</p><p><strong>Operator</strong></p><p>Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Jay Chaudhry for any closing remarks.</p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p> <p>All right. Well, thank you all for joining us. We look forward to seeing you at one of these sell-side conferences that we will be attending. Thank you again.</p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p> <p>Thank you.</p><p><strong>Operator</strong></p><p>[Operator signoff]</p> <p><strong>Duration: 63 minutes</strong></p><h2>Call participants:</h2><p><strong>Bill Choi</strong> -- <em>Senior Vice President of Investor Relations</em></p><p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p><p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p><p><strong>Walter Pritchard</strong> -- <em>Citi -- Analyst</em></p><p><strong>Matt Hedberg</strong> -- <em>RBC Capital Markets -- Analyst</em></p><p><strong>Alex Henderson</strong> -- <em>Needham and Company -- Analyst</em></p><p><strong>Andrew Nowinski</strong> -- <em>D.A. Davidson -- Analyst</em></p><p><strong>Brad Zelnick</strong> -- <em>Credit Suisse -- Analyst</em></p><p><strong>Keith Bachman</strong> -- <em>BMO Capital Markets -- Analyst</em></p><p><strong>Daniel Bartus</strong> -- <em>Bank of America Merrill Lynch -- Analyst</em></p><p><strong>Brian Essex</strong> -- <em>Goldman Sachs -- Analyst</em></p><p><strong>Patrick Colville</strong> -- <em>Deutsche Bank -- Analyst</em></p><p><strong>Jonathan Ruykhaver</strong> -- <em>Baird -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/zs">More ZS analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zscaler. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zscaler. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-82175", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZS"], "primary_tickers_companies": ["Zscaler"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zscaler, Inc. (ZS) Q4 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 58, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-82175"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-82175", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZS"], "primary_tickers_companies": ["Zscaler"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zscaler, Inc. (ZS) Q4 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 58, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ZS earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Zscaler, Inc.</strong> <span class="ticker" data-id="339947">(<a href="https://www.fool.com/quote/nasdaq/zscaler/zs/">NASDAQ:ZS</a>)</span><br/>Q4 2020 Earnings Call<br/><span id="date">Sep 09, 2020</span>, <em id="time">4:30 p.m. ET</em></p>, <h2>Contents:</h2>, , <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul>, , <h2>Prepared Remarks:</h2>, , <br/>, , <p><strong>Operator</strong></p>, <p>Ladies and gentlemen, thank you for standing by, and welcome to the Zscaler fiscal fourth quarter and full-year 2020 earnings conference call. [Operator instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded.</p>, , <p>[Operator instructions]I would now like to hand the conference over to Mr. Bill Choi, senior vice president of investor relations. Thank you. Please go ahead, sir.</p>, <p><strong>Bill Choi</strong> -- <em>Senior Vice President of Investor Relations</em></p>, , <p>Good afternoon, everyone, and welcome to the Zscaler fiscal fourth quarter and full-year 2020 earnings conference call. On the call with me today are, Jay Chaudhry, chairman and CEO; and Remo Canessa, CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis.</p>, , <p>You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release. For historical periods, the GAAP to the non-GAAP reconciliations can be found in the supplemental financial information. Starting in fiscal '21, we will be excluding stock-based compensation-related payroll taxes from our non-GAAP results. We have provided a separate table in the supplemental schedule with historical data for the last eight quarters.I'd like to remind you that today's discussion will contain forward-looking statements, including but not limited to the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, remaining performance obligations, income taxes, and earnings per share.</p>, <p></p>, <div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zscaler</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZscaler%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=580ec7eb-8b18-4b8d-8dd9-e84a2ca2765b">ten best stocks</a></strong> for investors to buy right now… and Zscaler wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZscaler%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=580ec7eb-8b18-4b8d-8dd9-e84a2ca2765b" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>, <p>These statements and other comments are not guarantees of future performance but rather are subject to risk and uncertainty, some of which are beyond our control, including but not limited to the duration and impact of COVID-19 on our business, the global economy, and the respective businesses of our customers, vendors, and partners. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC, as well as in today's earnings release.</p>, , <p>I would also like to inform you that management will be attending the following upcoming virtual investor conferences: Citi Global Technology Conference tomorrow, Deutsche Bank Technology Conference on September 15, Morningstar Management Behind the Moat Conference on September 29. Presentations for these events will be webcast and the links will be available on our investor relations website. Now, I'll turn the call over to Jay. </p>, <p><strong>Jay Chaudhry</strong> -- <em>Chairman and Chief Executive Officer</em></p>, , <p>Thank you, Bill, and thank you for joining us. I hope all of you and your families are staying healthy and safe. With the ongoing pandemic, I would like to acknowledge the tireless efforts of our team and partners who are committed to our customer success. I'm pleased to report our strong results for the fiscal fourth quarter and the full-year 2020 with exceptional growth in both new customer and upsell business.</p>, , <p>In Q4, we delivered growth of 46% in revenue and 55% in billings, reflecting the increased momentum in our business as our customers accelerate the digital transformation, despite the macroeconomic challenges. We offer customers a cloud-native platform which we call the Zscaler Zero Trust Exchange securely connecting users to applications or applications to applications in a borderless and hyperconnected digital world. In the new work-from-anywhere economy, where applications are moving to the cloud and users are outside the corporate network, traditional network and network security have become irrelevant. We ensure that businesses can operate at any scale with users anywhere in the world on any device independent of the network.</p>, , <p>We are helping our customers move from legacy network security to zero trust security, which reduces business risk and makes businesses agile and competitive. As I reflect on the past 12 months, culminating in our strong Q4 performance, I view fiscal '20 as a pivotal year in which we made tremendous progress on a number of strategic fronts to position us well for long-term growth. Zscaler has never been stronger, and I believe we have an incredible opportunity in front of us. Let me highlight three pillars of our strategy: our platform, our products, and our go-to-market.</p>, , <p>To start with our platform, Zscaler stands for Zenith of Scalability. True to our name, our platform continues to scale to new heights. Zscaler Zero Trust Exchange is the largest in-line cloud security platform in the world, and we are processing more than 120 billion transactions and blocking more than 100 million threats per day from users across 185 countries. This large dataset feeds our machine learning and AI engines for superior threat protection, better detection of user and application traffic anomalies, and faster resolution of performance bottlenecks.</p>, , <p>All this happens on a platform that uses 70% renewable energy today with a goal to use over 90%. Deployed across more than 150 data centers, our Zero Trust Exchange platform was built from the ground-up to fully deliver the promise of Gartner's Secure Access Service Edge or SASE framework. Traditional network security vendors are trying to co-opt our vision of cloud security after rejecting it for years. They're trying to retrofit the legacy appliances into a cloud world.</p>, , <p>But just like you can't create Netflix by stacking thousands of DVD players in the cloud, you can't offer an in-line, high-performance security cloud by spinning up bunch of virtual firewalls in a public cloud. To put it simply, having the right cloud-native architecture creates a significant barrier to entry cloud imitators. Building a cloud-native architecture with full security and minimal latency was a daunting challenge and running a massive in-line distributed cloud with five nines of availability is, in order of magnitude, more difficult. For large enterprises, who want network and security modernization, we believe we are the only cloud-native multi-tenant platform that meets their needs.</p>, , <p>We ended fiscal '20 with over 4,500 customers, including over 150 of the Fortune 500 and over 450 of the Global 2000 companies. We have over 100 customers that generate over $1 million in ARR, or annual recurring revenue. While the average NPS or net promoter score of an average hash company is 30, Zscaler's NPS is 76, which is 2.5 times higher, a proof of the value that Zscaler delivers. Next, on product innovation.</p>, , <p>This has been an exceptionally productive year for our engineering and product teams. We through internal innovation and highly targeted acquisitions, we have significantly increased the number of products available on our platform, further expanding our already substantial technology lead. During the year, we expanded the number of solutions from two to four, plus a flagship ZIA solution expanded with two new products, out-of-band CASB and Cloud Browser Isolation, which, together with our in-line CASB and advanced DLP, expanded our addressable market for data protection. Second, our ZPA solution which doubles our market opportunity has become the most mature zero trust solution with deep and wide functionality, including support for web and non-web applications.</p>, , <p>With deployment at a massive scale with over 150 Global 2000 customers, ZPA has become the market leader for zero-trust security. Third, with the Zscaler platform uniquely sitting between the user and application, our Zscaler Digital Experience or ZDX solution computes a performance score measuring the digital experience of every user and application helping customers to pinpoint and resolve performance issues further expanding our addressable market. Lastly, our next opportunity is to expand our Zero Trust Exchange to protect applications and data in public or private clouds. With our CSBM product, we can identify and remediate misconfigurations of cloud workloads, providing superior data protection.</p>, , <p>Our workload segmentation service implements a zero-trust architecture for app-to-app communication, where apps may be running on containers or virtual machines. This is a far superior approach for app segmentation without having to do network-based segmentation. What sets us apart from the many vendors who claim to have a platform is the following. Our platform is purpose-built for the cloud.</p>, , <p>It is designed to be extensible to integrate with our targeted acquisitions, as well as with third-party products. Legacy network security vendors can't create a cloud platform by cobbling together a bunch of acquired companies. History has shown that this approach does not work. Moving on to the third pillar: go-to-market.</p>, , <p>We further refined our metric-driven repeatable sales process, which is giving us deep visibility into our business and a strong and growing pipeline. We invested heavily this year to build our sales machine that we believe can demonstrate our compelling value to enterprises, drive larger deals and deliver consistent sales execution to take Zscaler beyond a $1 billion in annual revenue. Let me highlight a few of the go-to-market accomplishments. We significantly expanded our sales leadership by adding extra depth in our regional management.</p>, , <p>The build-out of our sales leadership is largely complete. We had another record quarter of hiring and exceeded our year-end target of 60% year-over-year increase in quota-carrying field reps. Even with the significant growth, our sales productivity was up for the year exceeding our expectations. Since we launched our Summit Partner Program, we recruited additional cloud-focused channel partners to drive further sales leverage.</p>, , <p>We are pleased to see increasing wins and larger deal size with our Summit Partners. I am extremely proud of our go-to-market team and how we executed our sales strategy this year. Now, let me provide some business highlights for the fourth quarter. Our ZIA business is accelerating due to our customers focus on work from anywhere.</p>, , <p>When employees are allowed to directly access SaaS applications and the Internet from their homes, security becomes a major risk and they need ZIA. We continue to see the increased adoption of our high-end Transformation Bundle, which includes cloud firewall and sandbox. At the end of fiscal '20, 49% of our ZIA annual recurring revenue is coming from the Transformation Bundle compared to 43% last year. Let me share two ZIA deals in the quarter that show our accelerated momentum with the financial services customers.</p>, , <p>A new customer initially engaged us to secure SD-WAN for 120 offices. They shifted the focus from SD-WAN to securing 40,000 employees in their homes as a result of the pandemic with sensitive financial data at risk. Security was a major requirement and only a proxy architecture was considered. This customer purchased the entire ZIA portfolio, including CASB, advanced DLP, and CSBM for Microsoft Office 365.</p>, , <p>Our integrated CASB offering replaced our CASB point product that by itself required three on-site engineers and a seven-figure annual spend. Our superior security at a very attractive ROI resonated with both the CIO and the CFO. In a ZIA upsell and other financial services company that has been a customer since 2018 merged with a peer and more than double the purchase of Business Bundle plus DLP to protect all 70,000 employees. Like the prior example, this customer only considered a proxy architecture.</p>, , <p>They standardize on our platform and consolidated three vendors, streamlining their operations and reducing their costs. Our product integration with Microsoft and CrowdStrike was an important consideration. Next, I would like to highlight ZPA. We continue to have strong adoption of ZPA, which is benefiting work from anywhere and applications migrating to the cloud.</p>, , <p>ZPA is more than a VPN replacement. It is an architectural shift to zero trust access for private applications in a multi-cloud environment. ZPA contributed 29% of our new and upsell business in fiscal '20 compared to 14% in the prior year. In the quarter, we closed our largest deal for ZPA with a longtime customer.</p>, , <p>This Global 100 conglomerate had already purchased the entire ZIA portfolio for all employees and, with the COVID pandemic, accelerated its transformation journey by purchasing ZPA for 300,000 employees. With resounding success with ZIA and significant trust in Zscaler, they deployed ZPA globally in just a couple of weeks as the world battled the spread of COVID. While the immediate objective for this deal was to eliminate legacy VPN, ZPA was selected to implement zero-trust security by establishing an application-level policy where you connect users to specific apps, not to a network. ZPA is providing secure access to over half a million unique applications and as a proof point of its maturity and scalability.</p>, , <p>Next, one of the world's largest IT services company with headquarters in Asia purchased ZPA for all 180,000 employees. This customer was using virtual firewalls and VPNs to protect their applications in the public cloud. They viewed each Internet-facing firewall or VPN as an attack surface that they wanted to eliminate. With the ZPA rollout, the customer reduced Internet exposure for hundreds of applications down to a handful in less than four weeks, greatly reducing business risk.</p>, , <p>Legacy vendors try to sell their cloud-based VPN but failed to meet the requirement for zero attack surface. I'm delighted to share that more customers are buying ZIA and ZPA together, which enables a true transformation with direct access to any application over any network. For example, a global professional services company purchased our Transformation Bundle plus DLP for 50,000 users and ZPA for 20,000 users. The business involves handling sensitive customer information, hence they needed inspection of all traffic including SSL for comprehensive data protection.</p>, , <p>The incumbent firewall vendor tried to sell its cloud-based offering but was disqualified as they could not meet the SSL inspection and DLP requirements. Our zero-trust approach will also help the customer to quickly integrate future M&A, a core growth strategy for this company. And lastly, in another new logo deal, a federal civilian agency purchased ZIA Business Bundle with cloud firewall plus DLP and ZPA for 21,000 users. When the pandemic started, the agency relied on legacy VPN technology which could not scale and resulted in poor user experience.</p>, , <p>While the immediate use case was VPN replacement, this agency acquired ZIA and ZPA together to transform its network and security with our FedRAMP authorized cloud platform. This win was notably our largest federal deal to date and we're building considerable momentum in the US federal market. With the highest levels of FedRAMP certifications of both ZIA and ZPA, which involves a rigorous process, we are positioned very well in this large market and we are proud to help our government customers do their critical work in these trying times. Let me touch on a couple of new products that are starting to contribute to deal wins.</p>, , <p>Our out-of-band CASB has become very comprehensive, helping us displace CASB point products and increase our deal size, as I indicated in the deal highlights. We are also starting to see early success with ZDX including wins with the European consumer products company and a US-based pharmaceutical company. While currently very small, we believe our new products create a significant growth opportunity. As we start the new fiscal year, we are in a fortunate position to be able to help our customers pursue digital transformation, their highest IT priority.</p>, , <p>With the mindset change and openness to transformation, I have seen an increase in CIO-level awareness and engagement with us. The inbound customer requests have greatly increased, and we're becoming a part of bigger Transformation projects and a key partner to consolidate point products, remove complexity, and save costs. We are excited about our mission to make the cloud safe for business and enjoyable for users. Now, I would like to turn over the call to Remo for our financial results.</p>, <p><strong>Remo Canessa</strong> -- <em>Chief Financial Officer</em></p>, , <p>Thank you, Jay. As mentioned, we are pleased with the results for the fourth quarter and the full-year 2020. Revenue for the quarter was $125.9 million, up 14% sequentially and 46% year over year. ZPA revenue was 12% of total revenue in the quarter.</p>, , <p>From a geographic perspective, for the quarter, Americas represented 50% of revenue, EMEA was 40%, and APJ was 10%. For the full year, revenue was $431.3 million, up 42% year over year. Turning to calculated billings, which we define as the changed deferred revenue for the quarter plus total revenue recognized in that quarter, billings grew 55% year over year to $194.9 million. As a reminder, our contract terms are typically one to three years, we primarily invoice our customers one year in advance.</p>, , <p>Remaining performance obligations or RPO, which represents our total committed non-cancelable future revenue was $783 million on July 31, up 41% from one year ago. The current RPO is 55% of the total RPO. ZPA was 29% of total new and upsell business in fiscal '20 compared to 14% in the prior year. We are seeing a higher attach rate of ZPA both in the number of deals and the number of seats per deal.</p>, , <p>We see a good mix of ZPA opportunities between new and existing customers. We have a large upsell opportunity as only 35% of our 450 Global 2000 customers have purchased ZPA. Our strong customer retention and ability upsell have resulted in a consistently high dollar-based net retention rate, which is 120% for the quarter compared to 118% a year ago and 119% last quarter. As we have highlighted, this metric will vary quarter to quarter.</p>, , <p>While good for our business, our increased success selling bigger Transformation Bundles selling both ZIA and ZPA from the start and faster upsells within a year can reduce our dollar-based net retention rate in the future. Considering these factors, we feel that 120% is outstanding.Total gross margin was 78% down 2 percentage points sequentially and 3 percentage points year over year. The decline is primarily due to ZPA traffic growing over 10 times since February. The augmented use of AWS and Azure to meet the surge in demand, which point out a significantly higher cost compared to our data centers.</p>, , <p>The gross margin was better than our guidance of 76% to 77% as we made solid progress on migrating more of the ZPA traffic to our data centers during the quarter. As we mentioned previously, our combined gross margins of our core products ZIA and ZPA are expected to return to 80% in the second half of fiscal 2021. However, most of our new emerging products, which include ZDX, workload segmentation, and CSBM will be running in the public cloud until we scale them into our own data centers in the future, while in the public cloud, these products will have lower gross margins than our core products. As a result, we expect total corporate gross margins to be 78%, 79% in fiscal 2021.</p>, , <p>Turning to operating expenses, our total operating expenses increased 14% sequentially and 46% year over year to $90.7 million, was flat year over year as a percentage of revenue at 72%. Operating expenses in Q4 includes approximately $2.9 million of expenses associated with the Cloudneeti and Edgewise acquisitions. Sales and marketing increased 14% sequentially and 46% year over year to $59.7 million. The year-over-year increase is due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E.</p>, , <p>We've been very successful in hiring and onboarding remotely. We exceeded our goal of increase in our field rep headcount by 60% for the full year. R&D was up 19% sequentially and up 54% year over year to $20.3 million. The increase was primarily due to continued investments in our team.</p>, , <p>G&A increased 8% sequentially and 33% year over year to $10.7 million. The growth in G&A includes investments in building our teams, compensation-related expenses, and professional fees including acquisition-related expenses. Our fourth-quarter operating margin was 6%, which compares to 9% in the same quarter last year. Net income in the quarter was $7 million or non-GAAP earnings per share of $0.05.</p>, , <p>We ended the quarter with over $1.3 billion in cash, cash equivalents, and short-term investments including net cash of approximately $1 billion raise for the June offering of convertible senior notes due in 2025. Free cash flow was positive $11 million in the quarter. Now, moving on to guidance. As a reminder, these numbers are all non-GAAP which excludes stock-based compensation expenses.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zscaler. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-82175", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZS"], "primary_tickers_companies": ["Zscaler"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zscaler, Inc. (ZS) Q4 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 58, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-82175"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-82175", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZS"], "primary_tickers_companies": ["Zscaler"], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zscaler, Inc. (ZS) Q4 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 58, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ZS earnings call for the period ending June 30, 2020. | Ladies and gentlemen, thank you for standing by, and welcome to the Zscaler fiscal fourth quarter and full-year 2020 earnings conference call. [Operator instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded.\n [Operator instructions]I would now like to hand the conference over to Mr. Bill Choi, senior vice president of investor relations. Thank you. Please go ahead, sir.\n Good afternoon, everyone, and welcome to the Zscaler fiscal fourth quarter and full-year 2020 earnings conference call. On the call with me today are, Jay Chaudhry, chairman and CEO; and Remo Canessa, CFO. Please note that we have posted our earnings release and a supplemental financial schedule to our Investor Relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis.\n You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release. For historical periods, the GAAP to the non-GAAP reconciliations can be found in the supplemental financial information. Starting in fiscal '21, we will be excluding stock-based compensation-related payroll taxes from our non-GAAP results. We have provided a separate table in the supplemental schedule with historical data for the last eight quarters.I'd like to remind you that today's discussion will contain forward-looking statements, including but not limited to the company's anticipated future revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, remaining performance obligations, income taxes, and earnings per share.\n These statements and other comments are not guarantees of future performance but rather are subject to risk and uncertainty, some of which are beyond our control, including but not limited to the duration and impact of COVID-19 on our business, the global economy, and the respective businesses of our customers, vendors, and partners. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC, as well as in today's earnings release.\n Thank you, Bill, and thank you for joining us. I hope all of you and your families are staying healthy and safe. With the ongoing pandemic, I would like to acknowledge the tireless efforts of our team and partners who are committed to our customer success. I'm pleased to report our strong results for the fiscal fourth quarter and the full-year 2020 with exceptional growth in both new customer and upsell business.\n In Q4, we delivered growth of 46% in revenue and 55% in billings, reflecting the increased momentum in our business as our customers accelerate the digital transformation, despite the macroeconomic challenges. We offer customers a cloud-native platform which we call the Zscaler Zero Trust Exchange securely connecting users to applications or applications to applications in a borderless and hyperconnected digital world. In the new work-from-anywhere economy, where applications are moving to the cloud and users are outside the corporate network, traditional network and network security have become irrelevant. We ensure that businesses can operate at any scale with users anywhere in the world on any device independent of the network.\n We are helping our customers move from legacy network security to zero trust security, which reduces business risk and makes businesses agile and competitive. As I reflect on the past 12 months, culminating in our strong Q4 performance, I view fiscal '20 as a pivotal year in which we made tremendous progress on a number of strategic fronts to position us well for long-term growth. Zscaler has never been stronger, and I believe we have an incredible opportunity in front of us. Let me highlight three pillars of our strategy: our platform, our products, and our go-to-market.\n To start with our platform, Zscaler stands for Zenith of Scalability. True to our name, our platform continues to scale to new heights. Zscaler Zero Trust Exchange is the largest in-line cloud security platform in the world, and we are processing more than 120 billion transactions and blocking more than 100 million threats per day from users across 185 countries. This large dataset feeds our machine learning and AI engines for superior threat protection, better detection of user and application traffic anomalies, and faster resolution of performance bottlenecks.\n All this happens on a platform that uses 70% renewable energy today with a goal to use over 90%. Deployed across more than 150 data centers, our Zero Trust Exchange platform was built from the ground-up to fully deliver the promise of Gartner's Secure Access Service Edge or SASE framework. Traditional network security vendors are trying to co-opt our vision of cloud security after rejecting it for years. They're trying to retrofit the legacy appliances into a cloud world.\n But just like you can't create Netflix by stacking thousands of DVD players in the cloud, you can't offer an in-line, high-performance security cloud by spinning up bunch of virtual firewalls in a public cloud. To put it simply, having the right cloud-native architecture creates a significant barrier to entry cloud imitators. Building a cloud-native architecture with full security and minimal latency was a daunting challenge and running a massive in-line distributed cloud with five nines of availability is, in order of magnitude, more difficult. For large enterprises, who want network and security modernization, we believe we are the only cloud-native multi-tenant platform that meets their needs.\n We ended fiscal '20 with over 4,500 customers, including over 150 of the Fortune 500 and over 450 of the Global 2000 companies. We have over 100 customers that generate over $1 million in ARR, or annual recurring revenue. While the average NPS or net promoter score of an average hash company is 30, Zscaler's NPS is 76, which is 2.5 times higher, a proof of the value that Zscaler delivers. Next, on product innovation.\n This has been an exceptionally productive year for our engineering and product teams. We through internal innovation and highly targeted acquisitions, we have significantly increased the number of products available on our platform, further expanding our already substantial technology lead. During the year, we expanded the number of solutions from two to four, plus a flagship ZIA solution expanded with two new products, out-of-band CASB and Cloud Browser Isolation, which, together with our in-line CASB and advanced DLP, expanded our addressable market for data protection. Second, our ZPA solution which doubles our market opportunity has become the most mature zero trust solution with deep and wide functionality, including support for web and non-web applications.\n With deployment at a massive scale with over 150 Global 2000 customers, ZPA has become the market leader for zero-trust security. Third, with the Zscaler platform uniquely sitting between the user and application, our Zscaler Digital Experience or ZDX solution computes a performance score measuring the digital experience of every user and application helping customers to pinpoint and resolve performance issues further expanding our addressable market. Lastly, our next opportunity is to expand our Zero Trust Exchange to protect applications and data in public or private clouds. With our CSBM product, we can identify and remediate misconfigurations of cloud workloads, providing superior data protection.\n Our workload segmentation service implements a zero-trust architecture for app-to-app communication, where apps may be running on containers or virtual machines. This is a far superior approach for app segmentation without having to do network-based segmentation. What sets us apart from the many vendors who claim to have a platform is the following. Our platform is purpose-built for the cloud.\n It is designed to be extensible to integrate with our targeted acquisitions, as well as with third-party products. Legacy network security vendors can't create a cloud platform by cobbling together a bunch of acquired companies. History has shown that this approach does not work. Moving on to the third pillar: go-to-market.\n We further refined our metric-driven repeatable sales process, which is giving us deep visibility into our business and a strong and growing pipeline. We invested heavily this year to build our sales machine that we believe can demonstrate our compelling value to enterprises, drive larger deals and deliver consistent sales execution to take Zscaler beyond a $1 billion in annual revenue. Let me highlight a few of the go-to-market accomplishments. We significantly expanded our sales leadership by adding extra depth in our regional management.\n The build-out of our sales leadership is largely complete. We had another record quarter of hiring and exceeded our year-end target of 60% year-over-year increase in quota-carrying field reps. Even with the significant growth, our sales productivity was up for the year exceeding our expectations. Since we launched our Summit Partner Program, we recruited additional cloud-focused channel partners to drive further sales leverage.\n We are pleased to see increasing wins and larger deal size with our Summit Partners. I am extremely proud of our go-to-market team and how we executed our sales strategy this year. Now, let me provide some business highlights for the fourth quarter. Our ZIA business is accelerating due to our customers focus on work from anywhere.\n When employees are allowed to directly access SaaS applications and the Internet from their homes, security becomes a major risk and they need ZIA. We continue to see the increased adoption of our high-end Transformation Bundle, which includes cloud firewall and sandbox. At the end of fiscal '20, 49% of our ZIA annual recurring revenue is coming from the Transformation Bundle compared to 43% last year. Let me share two ZIA deals in the quarter that show our accelerated momentum with the financial services customers.\n A new customer initially engaged us to secure SD-WAN for 120 offices. They shifted the focus from SD-WAN to securing 40,000 employees in their homes as a result of the pandemic with sensitive financial data at risk. Security was a major requirement and only a proxy architecture was considered. This customer purchased the entire ZIA portfolio, including CASB, advanced DLP, and CSBM for Microsoft Office 365.\n Our integrated CASB offering replaced our CASB point product that by itself required three on-site engineers and a seven-figure annual spend. Our superior security at a very attractive ROI resonated with both the CIO and the CFO. In a ZIA upsell and other financial services company that has been a customer since 2018 merged with a peer and more than double the purchase of Business Bundle plus DLP to protect all 70,000 employees. Like the prior example, this customer only considered a proxy architecture.\n They standardize on our platform and consolidated three vendors, streamlining their operations and reducing their costs. Our product integration with Microsoft and CrowdStrike was an important consideration. Next, I would like to highlight ZPA. We continue to have strong adoption of ZPA, which is benefiting work from anywhere and applications migrating to the cloud.\n ZPA is more than a VPN replacement. It is an architectural shift to zero trust access for private applications in a multi-cloud environment. ZPA contributed 29% of our new and upsell business in fiscal '20 compared to 14% in the prior year. In the quarter, we closed our largest deal for ZPA with a longtime customer.\n This Global 100 conglomerate had already purchased the entire ZIA portfolio for all employees and, with the COVID pandemic, accelerated its transformation journey by purchasing ZPA for 300,000 employees. With resounding success with ZIA and significant trust in Zscaler, they deployed ZPA globally in just a couple of weeks as the world battled the spread of COVID. While the immediate objective for this deal was to eliminate legacy VPN, ZPA was selected to implement zero-trust security by establishing an application-level policy where you connect users to specific apps, not to a network. ZPA is providing secure access to over half a million unique applications and as a proof point of its maturity and scalability.\n Next, one of the world's largest IT services company with headquarters in Asia purchased ZPA for all 180,000 employees. This customer was using virtual firewalls and VPNs to protect their applications in the public cloud. They viewed each Internet-facing firewall or VPN as an attack surface that they wanted to eliminate. With the ZPA rollout, the customer reduced Internet exposure for hundreds of applications down to a handful in less than four weeks, greatly reducing business risk.\n Legacy vendors try to sell their cloud-based VPN but failed to meet the requirement for zero attack surface. I'm delighted to share that more customers are buying ZIA and ZPA together, which enables a true transformation with direct access to any application over any network. For example, a global professional services company purchased our Transformation Bundle plus DLP for 50,000 users and ZPA for 20,000 users. The business involves handling sensitive customer information, hence they needed inspection of all traffic including SSL for comprehensive data protection.\n The incumbent firewall vendor tried to sell its cloud-based offering but was disqualified as they could not meet the SSL inspection and DLP requirements. Our zero-trust approach will also help the customer to quickly integrate future M&A, a core growth strategy for this company. And lastly, in another new logo deal, a federal civilian agency purchased ZIA Business Bundle with cloud firewall plus DLP and ZPA for 21,000 users. When the pandemic started, the agency relied on legacy VPN technology which could not scale and resulted in poor user experience.\n While the immediate use case was VPN replacement, this agency acquired ZIA and ZPA together to transform its network and security with our FedRAMP authorized cloud platform. This win was notably our largest federal deal to date and we're building considerable momentum in the US federal market. With the highest levels of FedRAMP certifications of both ZIA and ZPA, which involves a rigorous process, we are positioned very well in this large market and we are proud to help our government customers do their critical work in these trying times. Let me touch on a couple of new products that are starting to contribute to deal wins.\n Our out-of-band CASB has become very comprehensive, helping us displace CASB point products and increase our deal size, as I indicated in the deal highlights. We are also starting to see early success with ZDX including wins with the European consumer products company and a US-based pharmaceutical company. While currently very small, we believe our new products create a significant growth opportunity. As we start the new fiscal year, we are in a fortunate position to be able to help our customers pursue digital transformation, their highest IT priority.\n With the mindset change and openness to transformation, I have seen an increase in CIO-level awareness and engagement with us. The inbound customer requests have greatly increased, and we're becoming a part of bigger Transformation projects and a key partner to consolidate point products, remove complexity, and save costs. We are excited about our mission to make the cloud safe for business and enjoyable for users. Now, I would like to turn over the call to Remo for our financial results.\n Thank you, Jay. As mentioned, we are pleased with the results for the fourth quarter and the full-year 2020. Revenue for the quarter was $125.9 million, up 14% sequentially and 46% year over year. ZPA revenue was 12% of total revenue in the quarter.\n From a geographic perspective, for the quarter, Americas represented 50% of revenue, EMEA was 40%, and APJ was 10%. For the full year, revenue was $431.3 million, up 42% year over year. Turning to calculated billings, which we define as the changed deferred revenue for the quarter plus total revenue recognized in that quarter, billings grew 55% year over year to $194.9 million. As a reminder, our contract terms are typically one to three years, we primarily invoice our customers one year in advance.\n Remaining performance obligations or RPO, which represents our total committed non-cancelable future revenue was $783 million on July 31, up 41% from one year ago. The current RPO is 55% of the total RPO. ZPA was 29% of total new and upsell business in fiscal '20 compared to 14% in the prior year. We are seeing a higher attach rate of ZPA both in the number of deals and the number of seats per deal.\n We see a good mix of ZPA opportunities between new and existing customers. We have a large upsell opportunity as only 35% of our 450 Global 2000 customers have purchased ZPA. Our strong customer retention and ability upsell have resulted in a consistently high dollar-based net retention rate, which is 120% for the quarter compared to 118% a year ago and 119% last quarter. As we have highlighted, this metric will vary quarter to quarter.\n While good for our business, our increased success selling bigger Transformation Bundles selling both ZIA and ZPA from the start and faster upsells within a year can reduce our dollar-based net retention rate in the future. Considering these factors, we feel that 120% is outstanding.Total gross margin was 78% down 2 percentage points sequentially and 3 percentage points year over year. The decline is primarily due to ZPA traffic growing over 10 times since February. The augmented use of AWS and Azure to meet the surge in demand, which point out a significantly higher cost compared to our data centers.\n The gross margin was better than our guidance of 76% to 77% as we made solid progress on migrating more of the ZPA traffic to our data centers during the quarter. As we mentioned previously, our combined gross margins of our core products ZIA and ZPA are expected to return to 80% in the second half of fiscal 2021. However, most of our new emerging products, which include ZDX, workload segmentation, and CSBM will be running in the public cloud until we scale them into our own data centers in the future, while in the public cloud, these products will have lower gross margins than our core products. As a result, we expect total corporate gross margins to be 78%, 79% in fiscal 2021.\n Turning to operating expenses, our total operating expenses increased 14% sequentially and 46% year over year to $90.7 million, was flat year over year as a percentage of revenue at 72%. Operating expenses in Q4 includes approximately $2.9 million of expenses associated with the Cloudneeti and Edgewise acquisitions. Sales and marketing increased 14% sequentially and 46% year over year to $59.7 million. The year-over-year increase is due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E.\n We've been very successful in hiring and onboarding remotely. We exceeded our goal of increase in our field rep headcount by 60% for the full year. R&D was up 19% sequentially and up 54% year over year to $20.3 million. The increase was primarily due to continued investments in our team.\n G&A increased 8% sequentially and 33% year over year to $10.7 million. The growth in G&A includes investments in building our teams, compensation-related expenses, and professional fees including acquisition-related expenses. Our fourth-quarter operating margin was 6%, which compares to 9% in the same quarter last year. Net income in the quarter was $7 million or non-GAAP earnings per share of $0.05.\n We ended the quarter with over $1.3 billion in cash, cash equivalents, and short-term investments including net cash of approximately $1 billion raise for the June offering of convertible senior notes due in 2025. Free cash flow was positive $11 million in the quarter. Now, moving on to guidance. As a reminder, these numbers are all non-GAAP which excludes stock-based compensation expenses.\n Amortization of debt discount, amortization of intangible assets, facility exit costs, and any associated tax effects. As Bill indicated earlier, starting in fiscal 2021, we will also be excluding stock-based compensation related to payroll taxes from our non-GAAP results. For the first quarter of fiscal 2021, we expect revenue in the range of $131 million to $133 million, reflecting a year-over-year growth of 40% to 42%; operating profit in the range of $8 million to $10 million; other income of $500,000 net of interest payments on the senior convertible notes; income taxes of $1.25 million; and earnings per share of approximately $0.05 to $0.06, assuming 143 million common shares outstanding. For the full-year fiscal '21, we expect revenue in the range of $580 million to $590 million or year-over-year growth of 34% to 37%, calculated billings in the range of $710 million to $720 million or year-over-year growth of 29% to 31%.\n Over the last five years, first-half billings have represented on average 43% to 44% of full-year billings. We would expect a similar distribution in fiscal 2021. Operating profit in the range of $44 million to $46 million; other income of $2 million; income taxes of $5 million; and earnings per share in the range of $0.28 to $0.30, assuming approximately 145 million common shares outstanding. Our guidance reflects the increased investments in our business, driven by two major developments.\n One COVID-19 is accelerating digital transformation, which is the market Zscaler was created to serve. We feel we have momentum based on our performance and we see the market coming to us. Our plans are to continue to invest aggressively in sales and marketing behind the growth in our business. Two, our pursuit of additional market opportunities with our new products that Jay reviewed earlier.\n As I've indicated, the acquisitions of Cloudneeti and Edgewise are expected to have an immaterial impact on revenue in fiscal '21 while adding approximately $12 million to $14 million in operating expenses. In addition, we will increase investments in our technology platform and cloud infrastructure. Given our accelerated investments this year, we would like to provide an update to our long-term financial model. We expect to achieve 20% to 22% operating margin for the full year and fiscal '24.\n While we will balance growth and profitability, growth will take priority considering our significant market opportunity. We are confident of reaching our target operating model within the next four years. Now, I'd like to hand the call back over to Jay.\n Thank you, Remo. We believe we are in the early innings of a significant market opportunity to secure digital transformation. Just like Salesforce and Workday developed cloud-native multi-tenant platforms to disrupt large legacy software vendors, Zscaler has a similar opportunity to disrupt network security. With multiple tailwinds such as SaaS adoption, work-from-anywhere, and app migration to public clouds, we believe the market is coming to us.\n The value proposition of our zero-trust platform is resonating with customers. Our next big opportunity is to expand into securing app-to-app communication in the cloud, as well as monitoring end-to-end digital experience. As we demonstrated in recent quarters, we are delivering world-class sales execution and we believe we are positioned for long-term growth. We thank you for your interest in Zscaler and look forward to reporting our progress in the future.\n Operator, you may now open the call for questions.\n | Zscaler, Inc. | (NASDAQ:ZS) | Sep 09, 2020 | 4:30 p.m. ET | 4 | pm | 2020-09-09 | 2020-09-10 | 2020-09-09 | 2020-09-11 | NASDAQ | The year-over-year increase is due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E. | The year-over-year increase is due to higher compensation expenses and investments in building our teams and go-to-market initiatives offset by lower T&E. | [0.91903937 0.01173469 0.06922604] | positive | 0.907305 | 2020-09-11 | 139.960007 | 145.740005 | 131.149994 | 132.610001 | 5889849.0 | 135.479996 | 135.960007 | 126.860001 | 128.500000 | 2400987.0 | Technology | 2020-06-30 | 2020-06-30 | 0.07 | 0.023000 | 2020-06-30 | ZS | 0.047000 | beat | -11.460007 | decrease | 0 | positive |
| 600 | ZTO | /earnings/call-transcripts/2020/08/13/zto-express-zto-q2-2020-earnings-call-transcript/ | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>ZTO Express</strong> <span class="ticker" data-id="338702">(<a href="https://www.fool.com/quote/nyse/zto-express-cayman-inc/zto/">NYSE:ZTO</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 13, 2020</span>, <em id="time">9:00 p.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Good day and welcome to the ZTO Express Second Quarter Financial Results 2020 Conference Call and Webcast. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.</p><p>I would now like to turn the conference over to Sophie Li, IR Director to read the Safe Harbor. Please go ahead, Sophie.</p><p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p><p>Thank you, operator. Hello everyone and thank you for joining us today. The company's results and the Investor Relations presentation were released earlier today and are available on the company's IR website at ir.zto.com.</p><p>On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer and Ms. Huiping Yan, Chief Financial Officer. Mr Lai will give a brief overview of the company's business operations and highlights followed by Ms. Yan who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows.</p><p>I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations in the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.</p><p>It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English.</p><p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p><p>[Foreign Speech]</p><p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p><p>Thank you Meisong. Now please allow me to translate. Hello to everyone and thank you for joining us for today's earnings call. As the COVID-19 condition further stabilize, China experienced a healthy rebound in economic activities and a strong rally in domestic consumption during the second quarter of 2020. As such, China express delivery industry generated 5.64 billion incremental parcels and grew 36.7% year-over-year, which is the highest level of quarterly volume growth since 2017. As the industry leader, ZTO achieved a total of 4.6 billion parcels in the second quarter, representing 47.9% year-over-year growth and we expanded our leading market share to 21.5%. Meanwhile, we were able to maintain an improvement trend on quality of services and customer satisfaction while achieving high-volume growth.</p><p>During the second quarter, we maintained our key strategy which is to accelerate volume growth, increase our lead and continue expanding our market share. When price competition intensified, we made necessary modifications to our network policies to boost the level of intensive and show of collaboration between pickup and delivery allies with fee balancing mechanism. In addition, we granted low or zero interest loans to selected network partners through ZTO Finance to provide cash flow relief. Amidst a competitive pressure withstood by our network partners to face challenges and look to the future, our network remained stable.</p><p>Meanwhile, we furthered our effort to improve cost of productivity. Subsequent to the first quarter investment, we brought in roughly another 2,100 additional high-capacity vehicles, opened up 500 new line-haul routes and greatly reduced the use of third-party logistics services during the second quarter. The increased use of automation equipment and continuous functional upgrades allowed us to be less dependent to labor. New initiatives on improving timeliness such as process breakdown and separate monitoring enhanced the certainty and stability. As a result, our combined sorting and transportation costs per parcel declined by 17.1%. The continuous improvements in our operating efficiency tempered the impact of price competition. Despite intense competition, ZTO was able to balance among quality of services, market share and earnings as a combined result of strong consumption driven volume growth and a cost efficiency gain, which helped to offset the impact from ASP decline.</p><p>We achieved an adjusted net income of RMB1.45 billion, which increased 5.6%. We believe in the positive growth prospect of the China express delivery industry. We also recognize that with the current market dynamics, where the leading scaled express delivery companies are relatively close in market share and competition becomes inevitable, we must focus on what we can do to gear up and widen our competitive lead in order to achieve absolute supremacy. Within the next two to three years, average daily parcel volume is likely to top over 300 million parcels and we must maintain a long-term vision and a focus on immediate task and work diligently to retain comprehensive revenue.</p><p>Going forward, we will continue to focus on strengthening infrastructure across our entire network and improving operational efficiency through the following. First, developing our infrastructure to be capable of handling over 100 million daily volume in the near future. We will increase investment in self-owned facility and provide financing to support our network partners who will also increase their processing capability. We will gradually enhance the network structure through delayering and the streamlining, reducing the frequency of aggregation and sortation. Secondly, improve our operational efficiencies to consistently reduce unit cost in addition to skill leverage, enhanced resource planning and dispatch in line-haul transportation and raise the level of digitization and automation for sortation and advance toward building smart technology enabled logistic park.</p><p>Thirdly, lay a strong foundation for multichannel last-mile express plus business model, further implement vendor front-line couriers fee structure, cultivate entrepreneurial initiative on one hand and accelerate development of last-mile post to secure delivery cost advantage and shorten the distance between product and consumers. Last but not least, accelerate design and the implementation of innovative products such as scheduled pickup, on-demand delivery and coaching services either catered toward consumers' individualized needs or for few logistic requirements for specialty goods and create differentiated product line and relevant processing capability. With brand awareness, develop consumer psyches to improve logistical experience.</p><p>All above endeavors holds the key to us transforming from a leading express delivery company to an equal advantage comprehensive logistic service provider. And to accomplish that, technology and data analytics are instrumental. Apart from delivering results through our daily operations, our business managers are learning to monitor and analyze processes and associated result in order to identify problems and make necessary decisions accordingly.</p><p>Quality of services, market share and profitability remains our strategic priorities. Sustained growth of our core express business will establish a strong moat for ZTO to transform into a world leading comprehensive logistics service provider and the development of our ecosystem is our passageway to achieve our mission. We have raised our guidance for the full year parcel volume to reach between 16.2 billion to 17 billion, a goal we will endeavor wholeheartedly to achieve. Given our scale today, it will not be difficult to obtain short term cost savings. However, we choose to focus on sustainability and a balanced interest of all our substitutes for long term win-win.</p><p>We firmly believe that the China express delivery industry will continue to progress well. We are confident in our ability to seize the opportunity and win this marathon like race. Perhaps, the biggest challenges as well as the mightiest of strength lies with whether we and our partners can stay true to our intentions, focus on our common goals and maintain safe and confidence and deliver solid execution in every aspect.</p><p>With that being said, let's turn to our CFO, Huiping Yan, to go through our financials.</p><p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p><p>Thank you Chairman Lai and thank you Sophie. Hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentages changes refers to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website and I will highlight some of the key points here.</p><p>Benefited from a strong rebound in e-commerce-driven consumption after the COVID-19 situation has been significantly contained within China, ZTO delivered a strong volume growth in the second quarter. Our parcel volume grew 47.9% to 4.6 billion and our market share expanded by 1.6 points to reach 21.5%.</p><p>Total revenues increased by 18% to RMB6.4 billion. For core express delivery businesses, the ASP declined by RMB0.34 or 20.9% for the quarter, better than industry peers. It included RMB0.28 volume incentives as added support to our network partners in order to maintain and protect market share as well as keeping our network stable, RMB0.02 related to increased adoption of single sheet digital waybill and RMB0.02 declined due to parcel weight drop.</p><p>Gross profit of RMB1.8 billion, which was relatively flat from last year. Gross profit margin decreased five points to 27.6% as a combined result of volume increase, unit price decline, as previously stated and cost productivity gain. Unit transportation costs declined 20.4% or RMB0.12 to RMB0.43, primarily due to increased number of self-owned high capacity trailer trucks. The decrease in diesel price and national toll-free policy that ended nearly toward the end of the May also contributed to cost decreases. Unit sorting costs declined 11.1% to RMB0.04 -- or RMB0.04 to RMB0.27 as a greater number of automated sorting equipment were placed in use, allowing a higher proportion of our parcels to be processed automatically instead of manually.</p><p>SG&A increased by 2.3%. Excluding share-based compensation, SG&A as a percentage of total revenue decreased by 0.5 points to 4.9%, demonstrating positive operating leverage from our efficient corporate structure. Income from operations, excluding SBC, increased by 9.5% and associated margin declined 2 points which is narrower than the gross profit margin decline because of SG&A leverage and increased other operating income mainly consisted of government subsidies and tax rebates.</p><p>Operating cash flow was RMB1.252 billion for second quarter, compared with RMB1.993 billion in the same period last year. The decrease resulted mainly from the increase in financing provided to our network partners and higher prepaid fuel and toll cost driven by larger self-owned fleet. Capex for the quarter was RMB2.25 billion, RMB1.44 billion higher than the same period last year as we increased investments such as adding over 2,100 high-capacity vehicles to further strengthen our infrastructure and capacity for anticipated volume increase in the core business.</p><p>Now turning to our business outlook. Taking into consideration the current market condition, the negative impact from COVID-19, price competition and the company prioritized goal to achieve accelerated market share gain while maintaining our target level of earnings, we raised our 2020 annual parcel volume projection to be in the range of 16.2 billion to 17 billion, representing a 33.7% to 40.3% increase year-over-year. And we lowered the adjusted net income for 2020 to be in the range of RMB4.8 billion to RMB5.2 billion, representing a 1.7% to 9.3% decrease year-over-year. These estimates represent management's current and preliminary view, which are subject to change.</p><p>This concludes our prepared remarks. Operator, please open the line for questions. Thank you.</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-88196">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-88196');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Baoying Zhai with Citi. Please go ahead.</p><p><strong>Baoying Zhai</strong> -- <em>Citigroup Inc. -- Analyst</em></p><p>[Foreign Speech] Two questions. The first question is regarding the second quarter KA business. We actually noticed sudden acceleration of the KA volume growth in second quarter, which also leads to the KA cost increase a lot in second quarter. What's the reasons behind, it is as intentional to do the KA business in second quarter or it's due to the pandemic stimulation which helped more online penetration of our KA clients?</p><p>The second question is regarding the guidance. May I ask Huiping Yan to provide more breakdown into the implied ASP assumption and the cost reduction assumption in the second half? And also I want to touch on the intention behind the guidance. Actually we can see the first half, our pricing strategy was executed very well until some external disruption or is supposed to see a very good opportunity to clear the landscape among Tongda players. But now, we are going to see more complex competition not only from Tongda players but also non-Tongda players, will you still insist our first half strategy was the reason behind it?</p><p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p><p>Thank you for your question. Let me address the KA question, then I will turn it over to Chairman Lai for the pricing strategy. KA increase, yes, this quarter we did see surge in the KA and this is partly proactive and partly not proactive. The decline in the gross margin is in line with the margin activity or margin movement with the express core business other than KA.</p><p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p><p>[Foreign Speech]</p><p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p><p>Okay. Chairman says, first of all our strategy remains. We will focus on prioritizing on expanding our market share and increased our lead. And we will further leverage our advantages to maintain the discipline. While we did see in the second quarter the price decline more severely as expected, we always believe to ensure our network partners maintain their level of profitability and also our couriers achieve highest pay in the market and our team maintains confidence. These are important things for us to uphold. Short-term gains are easily obtained. But we are focusing more on all parties' interest and we want to be able to allow and ensure our network partners are better off than our competitive peers' network partners. And then we also will be insistent upon making profit on all aspects throughout the whole process of a particular package. So we don't bring in ineffective volumes, as we stated before.</p><p>With all these thinking, if I may supplement that we still see in the third quarter, the price competition persisted and to be prepared for implementing the strategies that Chairman Lai just described, we lowered our profit target to be ready and also it is a level. It maintains a level comparable to our last year's level for the last three quarters. If you notice that the first quarter COVID-19 impact was severe to the business, but the last three quarters looking forward, we are confident in achieving the targeted level of profit and further accelerate the growth on our market share. If I further may add, looking beyond this year or looking beyond the next few quarters is more of our focus because we do look forward to the long term prospect. The 300 million daily volume may arrive sooner than we expect. So we are focusing on our ability to build capacity to be ready and our capacity, our capability is our advantage so that we can gain more market share and the pricing power will follow.</p><p><strong>Baoying Zhai</strong> -- <em>Citigroup Inc. -- Analyst</em></p><p>[Foreign Speech] So may I follow-up on the cost reduction guidance for the next few quarters.</p><p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p><p>Yes. Thank you for your question. We have always been focusing on gaining productivity. As volume increases, we will naturally achieve the scaled leverage, but further in addition to that, we will continue to innovate, continue to modify and improve our network structure, as Chairman had mentioned in his prepared remarks. Delayering and also streamlining our overall network structure will allow us to reduce costs, improve efficiency and timeliness of our overall product. So the outlook for our productivity gain on transportation and our sorting are going to be expected.</p><p><strong>Operator</strong></p><p>Thank you. Your next question comes from Ronald Keung with Goldman Sachs. Please go ahead.</p><p><strong>Ronald Keung</strong> -- <em>Goldman Sachs -- Analyst</em></p><p>Thank you. Let me ask in Chinese and I will translate in English. [Foreign Speech]</p><p>Now I will translate. So it seems the very high efficiency of how the ASP cuts versus the market share gain that you achieved in the second quarter and our profit guidance roughly suggests flat to slightly up in profit growth, as you said, versus last year. So should we interpret this strategy as not only in the second half, but actually for the next one or two years as well until we achieve a scale that we are happy with, which you mentioned before the 25% market share in two years time? So when I hear about how do we think about absolute net profit? Any requirements there that we want to achieve or we should, given the high efficiency, we should kind of continue this strategy until we reach scalable, at least the 25% scale that you talked about? Thank you.</p><p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p><p>[Foreign Speech]</p><p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p><p>Okay. So let me translate. First of all, we believe the express delivery industry has still a long way to go. It is a marathon. The concentration of the market share will continue to concentrate and the stronger will get stronger and the bigger will get bigger. The Chinese market industry cannot contain that many players. Our business, particularly our network, is the most stable. And despite the competition, our price compared to our peers still has premium and in fact we believe in certain areas, the price differential is expanding. That is to say that our businesses is more preferred compared to our other competitive peers.</p><p>In the meantime, to anticipate volume increases, we are preparing on many aspects as following. One, continue to and if not increasing our investment in infrastructure, not only to improve our facility capabilities, but also help and empower our network partners through financing support to help them invest in facilities as well as automation. The overall effort in developing differentiated products, as we mentioned before, including time-definite products or individualized on-demand pickup and delivery as well as coaching. All these, as we mentioned, will help us expand our leadership and ensure our last-mile network partners as well as our couriers achieve the highest probability and overall capability as well as stability.</p><p>Looking to the future, as you asked Ronald, to reach 25% price competition -- around 2020, our goal is to reach 25%, price competition may not be necessary. As the Chairman said, even without price competition, our market share will continue to expand because of our core capability of our better managed and the higher operational efficiencies, as well as the entire network with better quality of earnings. So with that we believe, again, our focus is on the future is to achieve and one of the items, if I may go back to, is that, Chairman described further what it means to delayer. In the past, we won and we surpassed our competitors through connection or better efficiency connecting our transit super-centers. And gradually throughout the past and going forward, we developed capabilities to connect origination sorting center to destination outlets.</p><p>Going forward, we would further supplement the capability of our network, including connecting between the origination outlet and destination outlets. That is what we said, reducing the frequency of sortation and that will further expand our capability so that we could bring in more volume, process it better and deliver it faster and better.</p><p><strong>Ronald Keung</strong> -- <em>Goldman Sachs -- Analyst</em></p><p>Thank you. Meisong, thank you.</p><p><strong>Operator</strong></p><p>[Operator Instructions] Your next question comes from Huan Su [Phonetic] with JPJA [Phonetic] Securities. Please go ahead.</p><p><strong>Huan Su</strong> -- <em>JPJA Securities -- Analyst</em></p><p>[Foreign Speech] My question is mainly about your last-mile. The first one is about short term. What are the proportions of our different last-mile solutions in the second quarter? Did they change a lot?</p><p>And second question is about long term last-mile price differential. Because in recent years, last-mile fee has taken more and more proportion in our total cost and cost of different last-mile solutions were allowed. So I was wondering, in the future is it possible to have different prices for different last-mile solutions? Thank you.</p><p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p><p>Thank you for your questions. So far, the last-mile investment and development has been benefiting us in handling greater amount of last-mile delivery as well as reducing cost for our network partners. Again, the cost of delivery up to the last-mile belongs to our network partners. And the volume is somewhere between 40% to 45% of the last-mile packages now being handled by non-door-to-door delivery. And you talked about potential differentiation or the last-mile cost differentiation. And here are some of the thoughts. Last-mile is a key fee segment of our business in terms of the four segments. So the impact of the pickup and delivery being the two ends. The delivery cost going forward with volume increase, you would anticipate to increase if without any of the alternative methods such as drop-off box or post. So we believe, first of all to address this increase in cost, we started early in 2018, toward the end of 2018, encouraging our network partners to invest in the last-mile capability because last-mile resources are scarce and to ensure our presence there will help our network partners to secure the lowest cost of delivery in the future.</p><p>Now another second layer which probably is more related to your question is that because of our last-mile presence and our connectivity with consumers, with customers, our couriers are able to achieve a better connection and hence bring about potential commercial opportunities. And that is part of what we are currently investing, researching and designing and implementing so that we could help our network partners to one, ease the initial investment pressure when they first start the last-mile post operations and then two, allowing them to gradually ramp up their capabilities of commercial operations.</p><p>I hope that answers your question.</p><p><strong>Operator</strong></p><p>Thank you. Your next question is a follow-up question from Baoying Zhai with Citi. Please go ahead.</p><p><strong>Baoying Zhai</strong> -- <em>Citigroup Inc. -- Analyst</em></p><p>[Foreign Speech] So my question is regarding the payment to delivery guys because Meisong emphasized that ZTO actually paid much better to their delivery guys compared with peers to ensure the stability of network. I actually noticed there was a program that's called like the direct payment of the deliveries to last-mile delivery guys. Could you please share more details on this program and that target of the program and how is the feedback so far? Thanks.</p><p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p><p>[Foreign Speech]</p><p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p><p>The design thinking behind this model of directly connecting with our courier is as such. It's part of our delayering initiatives. As we mentioned before, if I may, that we have started to develop the standard pickup and delivery fee schedule in 2018 and when we are able to make it transparent between what we pay to the network partners and what they pay to the couriers because we think the business, the platform, the transit and the sortation is strong, but most importantly the package needs to be delivered and that's the touch point with our consumers. So therefore, our courier holds a very important key, facing customer.</p><p>So to help them develop from an employee or may be a just a little entrepreneur to truly motivated to work for their own because they are able to achieve more market-driven as well as a fair pay that is passed through to them through the network partners. And so far what we have seen is that our network partners responded quite well at to this model. In fact they believe their couriers are more stable, are more focused on the quality of services to their customers. So therefore they are bringing in more volumes and bringing in more customers. So it's a win-win for all the parties involved. So far, around 40% of our network partners have signed up and started to implement this model. And our goal is to achieve at least 50%. But by looking at the current trend or current responses, we believe we may exceed that 50% coverage goal that we set before.</p><p><strong>Operator</strong></p><p>Thank you. Your next question is a follow-up question from Huan Su with JPJA Securities. Please go ahead.</p><p><strong>Huan Su</strong> -- <em>JPJA Securities -- Analyst</em></p><p>[Foreign Speech] My question is about the capital expenditure. The first one is that we noticed that the capital expenditure in the second quarter increased about more than 170%. And will it continue in the second half of the year?</p><p>And the second question is about the capital expenditure of our network partners. So for the capital expenditure, our network partners have the same importance with ourselves. So do you have a rough estimate for the proportion of capital expenditure for ourselves and our network partners? Thank you.</p><p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p><p>Thank you for your question. Indeed, as you stated, this quarter, the past second quarter, we acquired and placed in service a lot of the increment of trucks and vehicles that we invested is around 2,100 or 2,200. So this is a one-time. But yeah, we believe investment in the infrastructure is one of our key strategies to build capacity in anticipation of the high-volume by incoming volume. The overall budget for capex spending is around RMB7 billion for this year. We think that is somewhere close to what we had previously talked about, RMB6 billion to RMB8 billion range. The investment by our network partners, yes, indeed are increasing. As we know, we invest in our own capacity, but because it is pickup, transit, sorting and delivery, all four aspects needs to be coordinated and in sync.</p><p>So a lot of our network partners are expanding their capabilities as well. Some of the figures I could provide you is that we have anticipated over 100 automation lines to be installed by our network partners. And so far, we have already seen the network partners invested over 50 of that. So toward the high season, we think the investment pace will pickup even further. Some of our larger network partners also invest in land and this is a long term investment, which again demonstrated their belief and the confidence in the future of the business together with us.</p><p><strong>Operator</strong></p><p>Thank you. This concludes our conference for today. I would like to turn the conference back to the company for any closing remarks.</p><p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p><p>Thanks again for everyone on joining us for today's call. Any further questions, we welcome and we are looking forward to talk with you soon.</p><p><strong>Duration: 61 minutes</strong></p><h2>Call participants:</h2><p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p><p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p><p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p><p><strong>Baoying Zhai</strong> -- <em>Citigroup Inc. -- Analyst</em></p><p><strong>Ronald Keung</strong> -- <em>Goldman Sachs -- Analyst</em></p><p><strong>Huan Su</strong> -- <em>JPJA Securities -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/zto">More ZTO analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than ZTO Express (Cayman) Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZTO%2520Express%2520%2528Cayman%2529%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=d2b97dec-22fb-4c14-885b-8e628f75b726">ten best stocks</a></strong> for investors to buy right now… and ZTO Express (Cayman) Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZTO%2520Express%2520%2528Cayman%2529%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=d2b97dec-22fb-4c14-885b-8e628f75b726" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-20722", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZTO"], "primary_tickers_companies": ["ZTO Express (Cayman) Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ZTO Express (ZTO) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 7, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-20722"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-20722", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZTO"], "primary_tickers_companies": ["ZTO Express (Cayman) Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ZTO Express (ZTO) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 7, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ZTO earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>ZTO Express</strong> <span class="ticker" data-id="338702">(<a href="https://www.fool.com/quote/nyse/zto-express-cayman-inc/zto/">NYSE:ZTO</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 13, 2020</span>, <em id="time">9:00 p.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Good day and welcome to the ZTO Express Second Quarter Financial Results 2020 Conference Call and Webcast. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.</p>, <p>I would now like to turn the conference over to Sophie Li, IR Director to read the Safe Harbor. Please go ahead, Sophie.</p>, <p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p>, <p>Thank you, operator. Hello everyone and thank you for joining us today. The company's results and the Investor Relations presentation were released earlier today and are available on the company's IR website at ir.zto.com.</p>, <p>On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer and Ms. Huiping Yan, Chief Financial Officer. Mr Lai will give a brief overview of the company's business operations and highlights followed by Ms. Yan who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows.</p>, <p>I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations in the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.</p>, <p>It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English.</p>, <p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p>, <p>[Foreign Speech]</p>, <p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p>, <p>Thank you Meisong. Now please allow me to translate. Hello to everyone and thank you for joining us for today's earnings call. As the COVID-19 condition further stabilize, China experienced a healthy rebound in economic activities and a strong rally in domestic consumption during the second quarter of 2020. As such, China express delivery industry generated 5.64 billion incremental parcels and grew 36.7% year-over-year, which is the highest level of quarterly volume growth since 2017. As the industry leader, ZTO achieved a total of 4.6 billion parcels in the second quarter, representing 47.9% year-over-year growth and we expanded our leading market share to 21.5%. Meanwhile, we were able to maintain an improvement trend on quality of services and customer satisfaction while achieving high-volume growth.</p>, <p>During the second quarter, we maintained our key strategy which is to accelerate volume growth, increase our lead and continue expanding our market share. When price competition intensified, we made necessary modifications to our network policies to boost the level of intensive and show of collaboration between pickup and delivery allies with fee balancing mechanism. In addition, we granted low or zero interest loans to selected network partners through ZTO Finance to provide cash flow relief. Amidst a competitive pressure withstood by our network partners to face challenges and look to the future, our network remained stable.</p>, <p>Meanwhile, we furthered our effort to improve cost of productivity. Subsequent to the first quarter investment, we brought in roughly another 2,100 additional high-capacity vehicles, opened up 500 new line-haul routes and greatly reduced the use of third-party logistics services during the second quarter. The increased use of automation equipment and continuous functional upgrades allowed us to be less dependent to labor. New initiatives on improving timeliness such as process breakdown and separate monitoring enhanced the certainty and stability. As a result, our combined sorting and transportation costs per parcel declined by 17.1%. The continuous improvements in our operating efficiency tempered the impact of price competition. Despite intense competition, ZTO was able to balance among quality of services, market share and earnings as a combined result of strong consumption driven volume growth and a cost efficiency gain, which helped to offset the impact from ASP decline.</p>, <p>We achieved an adjusted net income of RMB1.45 billion, which increased 5.6%. We believe in the positive growth prospect of the China express delivery industry. We also recognize that with the current market dynamics, where the leading scaled express delivery companies are relatively close in market share and competition becomes inevitable, we must focus on what we can do to gear up and widen our competitive lead in order to achieve absolute supremacy. Within the next two to three years, average daily parcel volume is likely to top over 300 million parcels and we must maintain a long-term vision and a focus on immediate task and work diligently to retain comprehensive revenue.</p>, <p>Going forward, we will continue to focus on strengthening infrastructure across our entire network and improving operational efficiency through the following. First, developing our infrastructure to be capable of handling over 100 million daily volume in the near future. We will increase investment in self-owned facility and provide financing to support our network partners who will also increase their processing capability. We will gradually enhance the network structure through delayering and the streamlining, reducing the frequency of aggregation and sortation. Secondly, improve our operational efficiencies to consistently reduce unit cost in addition to skill leverage, enhanced resource planning and dispatch in line-haul transportation and raise the level of digitization and automation for sortation and advance toward building smart technology enabled logistic park.</p>, <p>Thirdly, lay a strong foundation for multichannel last-mile express plus business model, further implement vendor front-line couriers fee structure, cultivate entrepreneurial initiative on one hand and accelerate development of last-mile post to secure delivery cost advantage and shorten the distance between product and consumers. Last but not least, accelerate design and the implementation of innovative products such as scheduled pickup, on-demand delivery and coaching services either catered toward consumers' individualized needs or for few logistic requirements for specialty goods and create differentiated product line and relevant processing capability. With brand awareness, develop consumer psyches to improve logistical experience.</p>, <p>All above endeavors holds the key to us transforming from a leading express delivery company to an equal advantage comprehensive logistic service provider. And to accomplish that, technology and data analytics are instrumental. Apart from delivering results through our daily operations, our business managers are learning to monitor and analyze processes and associated result in order to identify problems and make necessary decisions accordingly.</p>, <p>Quality of services, market share and profitability remains our strategic priorities. Sustained growth of our core express business will establish a strong moat for ZTO to transform into a world leading comprehensive logistics service provider and the development of our ecosystem is our passageway to achieve our mission. We have raised our guidance for the full year parcel volume to reach between 16.2 billion to 17 billion, a goal we will endeavor wholeheartedly to achieve. Given our scale today, it will not be difficult to obtain short term cost savings. However, we choose to focus on sustainability and a balanced interest of all our substitutes for long term win-win.</p>, <p>We firmly believe that the China express delivery industry will continue to progress well. We are confident in our ability to seize the opportunity and win this marathon like race. Perhaps, the biggest challenges as well as the mightiest of strength lies with whether we and our partners can stay true to our intentions, focus on our common goals and maintain safe and confidence and deliver solid execution in every aspect.</p>, <p>With that being said, let's turn to our CFO, Huiping Yan, to go through our financials.</p>, <p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you Chairman Lai and thank you Sophie. Hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentages changes refers to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website and I will highlight some of the key points here.</p>, <p>Benefited from a strong rebound in e-commerce-driven consumption after the COVID-19 situation has been significantly contained within China, ZTO delivered a strong volume growth in the second quarter. Our parcel volume grew 47.9% to 4.6 billion and our market share expanded by 1.6 points to reach 21.5%.</p>, <p>Total revenues increased by 18% to RMB6.4 billion. For core express delivery businesses, the ASP declined by RMB0.34 or 20.9% for the quarter, better than industry peers. It included RMB0.28 volume incentives as added support to our network partners in order to maintain and protect market share as well as keeping our network stable, RMB0.02 related to increased adoption of single sheet digital waybill and RMB0.02 declined due to parcel weight drop.</p>, <p>Gross profit of RMB1.8 billion, which was relatively flat from last year. Gross profit margin decreased five points to 27.6% as a combined result of volume increase, unit price decline, as previously stated and cost productivity gain. Unit transportation costs declined 20.4% or RMB0.12 to RMB0.43, primarily due to increased number of self-owned high capacity trailer trucks. The decrease in diesel price and national toll-free policy that ended nearly toward the end of the May also contributed to cost decreases. Unit sorting costs declined 11.1% to RMB0.04 -- or RMB0.04 to RMB0.27 as a greater number of automated sorting equipment were placed in use, allowing a higher proportion of our parcels to be processed automatically instead of manually.</p>, <p>SG&A increased by 2.3%. Excluding share-based compensation, SG&A as a percentage of total revenue decreased by 0.5 points to 4.9%, demonstrating positive operating leverage from our efficient corporate structure. Income from operations, excluding SBC, increased by 9.5% and associated margin declined 2 points which is narrower than the gross profit margin decline because of SG&A leverage and increased other operating income mainly consisted of government subsidies and tax rebates.</p>, <p>Operating cash flow was RMB1.252 billion for second quarter, compared with RMB1.993 billion in the same period last year. The decrease resulted mainly from the increase in financing provided to our network partners and higher prepaid fuel and toll cost driven by larger self-owned fleet. Capex for the quarter was RMB2.25 billion, RMB1.44 billion higher than the same period last year as we increased investments such as adding over 2,100 high-capacity vehicles to further strengthen our infrastructure and capacity for anticipated volume increase in the core business.</p>, <p>Now turning to our business outlook. Taking into consideration the current market condition, the negative impact from COVID-19, price competition and the company prioritized goal to achieve accelerated market share gain while maintaining our target level of earnings, we raised our 2020 annual parcel volume projection to be in the range of 16.2 billion to 17 billion, representing a 33.7% to 40.3% increase year-over-year. And we lowered the adjusted net income for 2020 to be in the range of RMB4.8 billion to RMB5.2 billion, representing a 1.7% to 9.3% decrease year-over-year. These estimates represent management's current and preliminary view, which are subject to change.</p>, <p>This concludes our prepared remarks. Operator, please open the line for questions. Thank you.</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-88196">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-88196');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Baoying Zhai with Citi. Please go ahead.</p>, <p><strong>Baoying Zhai</strong> -- <em>Citigroup Inc. -- Analyst</em></p>, <p>[Foreign Speech] Two questions. The first question is regarding the second quarter KA business. We actually noticed sudden acceleration of the KA volume growth in second quarter, which also leads to the KA cost increase a lot in second quarter. What's the reasons behind, it is as intentional to do the KA business in second quarter or it's due to the pandemic stimulation which helped more online penetration of our KA clients?</p>, <p>The second question is regarding the guidance. May I ask Huiping Yan to provide more breakdown into the implied ASP assumption and the cost reduction assumption in the second half? And also I want to touch on the intention behind the guidance. Actually we can see the first half, our pricing strategy was executed very well until some external disruption or is supposed to see a very good opportunity to clear the landscape among Tongda players. But now, we are going to see more complex competition not only from Tongda players but also non-Tongda players, will you still insist our first half strategy was the reason behind it?</p>, <p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you for your question. Let me address the KA question, then I will turn it over to Chairman Lai for the pricing strategy. KA increase, yes, this quarter we did see surge in the KA and this is partly proactive and partly not proactive. The decline in the gross margin is in line with the margin activity or margin movement with the express core business other than KA.</p>, <p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p>, <p>[Foreign Speech]</p>, <p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p>, <p>Okay. Chairman says, first of all our strategy remains. We will focus on prioritizing on expanding our market share and increased our lead. And we will further leverage our advantages to maintain the discipline. While we did see in the second quarter the price decline more severely as expected, we always believe to ensure our network partners maintain their level of profitability and also our couriers achieve highest pay in the market and our team maintains confidence. These are important things for us to uphold. Short-term gains are easily obtained. But we are focusing more on all parties' interest and we want to be able to allow and ensure our network partners are better off than our competitive peers' network partners. And then we also will be insistent upon making profit on all aspects throughout the whole process of a particular package. So we don't bring in ineffective volumes, as we stated before.</p>, <p>With all these thinking, if I may supplement that we still see in the third quarter, the price competition persisted and to be prepared for implementing the strategies that Chairman Lai just described, we lowered our profit target to be ready and also it is a level. It maintains a level comparable to our last year's level for the last three quarters. If you notice that the first quarter COVID-19 impact was severe to the business, but the last three quarters looking forward, we are confident in achieving the targeted level of profit and further accelerate the growth on our market share. If I further may add, looking beyond this year or looking beyond the next few quarters is more of our focus because we do look forward to the long term prospect. The 300 million daily volume may arrive sooner than we expect. So we are focusing on our ability to build capacity to be ready and our capacity, our capability is our advantage so that we can gain more market share and the pricing power will follow.</p>, <p><strong>Baoying Zhai</strong> -- <em>Citigroup Inc. -- Analyst</em></p>, <p>[Foreign Speech] So may I follow-up on the cost reduction guidance for the next few quarters.</p>, <p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p>, <p>Yes. Thank you for your question. We have always been focusing on gaining productivity. As volume increases, we will naturally achieve the scaled leverage, but further in addition to that, we will continue to innovate, continue to modify and improve our network structure, as Chairman had mentioned in his prepared remarks. Delayering and also streamlining our overall network structure will allow us to reduce costs, improve efficiency and timeliness of our overall product. So the outlook for our productivity gain on transportation and our sorting are going to be expected.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Your next question comes from Ronald Keung with Goldman Sachs. Please go ahead.</p>, <p><strong>Ronald Keung</strong> -- <em>Goldman Sachs -- Analyst</em></p>, <p>Thank you. Let me ask in Chinese and I will translate in English. [Foreign Speech]</p>, <p>Now I will translate. So it seems the very high efficiency of how the ASP cuts versus the market share gain that you achieved in the second quarter and our profit guidance roughly suggests flat to slightly up in profit growth, as you said, versus last year. So should we interpret this strategy as not only in the second half, but actually for the next one or two years as well until we achieve a scale that we are happy with, which you mentioned before the 25% market share in two years time? So when I hear about how do we think about absolute net profit? Any requirements there that we want to achieve or we should, given the high efficiency, we should kind of continue this strategy until we reach scalable, at least the 25% scale that you talked about? Thank you.</p>, <p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p>, <p>[Foreign Speech]</p>, <p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p>, <p>Okay. So let me translate. First of all, we believe the express delivery industry has still a long way to go. It is a marathon. The concentration of the market share will continue to concentrate and the stronger will get stronger and the bigger will get bigger. The Chinese market industry cannot contain that many players. Our business, particularly our network, is the most stable. And despite the competition, our price compared to our peers still has premium and in fact we believe in certain areas, the price differential is expanding. That is to say that our businesses is more preferred compared to our other competitive peers.</p>, <p>In the meantime, to anticipate volume increases, we are preparing on many aspects as following. One, continue to and if not increasing our investment in infrastructure, not only to improve our facility capabilities, but also help and empower our network partners through financing support to help them invest in facilities as well as automation. The overall effort in developing differentiated products, as we mentioned before, including time-definite products or individualized on-demand pickup and delivery as well as coaching. All these, as we mentioned, will help us expand our leadership and ensure our last-mile network partners as well as our couriers achieve the highest probability and overall capability as well as stability.</p>, <p>Looking to the future, as you asked Ronald, to reach 25% price competition -- around 2020, our goal is to reach 25%, price competition may not be necessary. As the Chairman said, even without price competition, our market share will continue to expand because of our core capability of our better managed and the higher operational efficiencies, as well as the entire network with better quality of earnings. So with that we believe, again, our focus is on the future is to achieve and one of the items, if I may go back to, is that, Chairman described further what it means to delayer. In the past, we won and we surpassed our competitors through connection or better efficiency connecting our transit super-centers. And gradually throughout the past and going forward, we developed capabilities to connect origination sorting center to destination outlets.</p>, <p>Going forward, we would further supplement the capability of our network, including connecting between the origination outlet and destination outlets. That is what we said, reducing the frequency of sortation and that will further expand our capability so that we could bring in more volume, process it better and deliver it faster and better.</p>, <p><strong>Ronald Keung</strong> -- <em>Goldman Sachs -- Analyst</em></p>, <p>Thank you. Meisong, thank you.</p>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] Your next question comes from Huan Su [Phonetic] with JPJA [Phonetic] Securities. Please go ahead.</p>, <p><strong>Huan Su</strong> -- <em>JPJA Securities -- Analyst</em></p>, <p>[Foreign Speech] My question is mainly about your last-mile. The first one is about short term. What are the proportions of our different last-mile solutions in the second quarter? Did they change a lot?</p>, <p>And second question is about long term last-mile price differential. Because in recent years, last-mile fee has taken more and more proportion in our total cost and cost of different last-mile solutions were allowed. So I was wondering, in the future is it possible to have different prices for different last-mile solutions? Thank you.</p>, <p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you for your questions. So far, the last-mile investment and development has been benefiting us in handling greater amount of last-mile delivery as well as reducing cost for our network partners. Again, the cost of delivery up to the last-mile belongs to our network partners. And the volume is somewhere between 40% to 45% of the last-mile packages now being handled by non-door-to-door delivery. And you talked about potential differentiation or the last-mile cost differentiation. And here are some of the thoughts. Last-mile is a key fee segment of our business in terms of the four segments. So the impact of the pickup and delivery being the two ends. The delivery cost going forward with volume increase, you would anticipate to increase if without any of the alternative methods such as drop-off box or post. So we believe, first of all to address this increase in cost, we started early in 2018, toward the end of 2018, encouraging our network partners to invest in the last-mile capability because last-mile resources are scarce and to ensure our presence there will help our network partners to secure the lowest cost of delivery in the future.</p>, <p>Now another second layer which probably is more related to your question is that because of our last-mile presence and our connectivity with consumers, with customers, our couriers are able to achieve a better connection and hence bring about potential commercial opportunities. And that is part of what we are currently investing, researching and designing and implementing so that we could help our network partners to one, ease the initial investment pressure when they first start the last-mile post operations and then two, allowing them to gradually ramp up their capabilities of commercial operations.</p>, <p>I hope that answers your question.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Your next question is a follow-up question from Baoying Zhai with Citi. Please go ahead.</p>, <p><strong>Baoying Zhai</strong> -- <em>Citigroup Inc. -- Analyst</em></p>, <p>[Foreign Speech] So my question is regarding the payment to delivery guys because Meisong emphasized that ZTO actually paid much better to their delivery guys compared with peers to ensure the stability of network. I actually noticed there was a program that's called like the direct payment of the deliveries to last-mile delivery guys. Could you please share more details on this program and that target of the program and how is the feedback so far? Thanks.</p>, <p><strong>Meisong Lai</strong> -- <em>Founder, Chairman of the Board of Directors and Chief Executive Officer</em></p>, <p>[Foreign Speech]</p>, <p><strong>Sophie Li</strong> -- <em>Director, Investor Relations</em></p>, <p>The design thinking behind this model of directly connecting with our courier is as such. It's part of our delayering initiatives. As we mentioned before, if I may, that we have started to develop the standard pickup and delivery fee schedule in 2018 and when we are able to make it transparent between what we pay to the network partners and what they pay to the couriers because we think the business, the platform, the transit and the sortation is strong, but most importantly the package needs to be delivered and that's the touch point with our consumers. So therefore, our courier holds a very important key, facing customer.</p>, <p>So to help them develop from an employee or may be a just a little entrepreneur to truly motivated to work for their own because they are able to achieve more market-driven as well as a fair pay that is passed through to them through the network partners. And so far what we have seen is that our network partners responded quite well at to this model. In fact they believe their couriers are more stable, are more focused on the quality of services to their customers. So therefore they are bringing in more volumes and bringing in more customers. So it's a win-win for all the parties involved. So far, around 40% of our network partners have signed up and started to implement this model. And our goal is to achieve at least 50%. But by looking at the current trend or current responses, we believe we may exceed that 50% coverage goal that we set before.</p>, <p><strong>Operator</strong></p>, <p>Thank you. Your next question is a follow-up question from Huan Su with JPJA Securities. Please go ahead.</p>, <p><strong>Huan Su</strong> -- <em>JPJA Securities -- Analyst</em></p>, <p>[Foreign Speech] My question is about the capital expenditure. The first one is that we noticed that the capital expenditure in the second quarter increased about more than 170%. And will it continue in the second half of the year?</p>, <p>And the second question is about the capital expenditure of our network partners. So for the capital expenditure, our network partners have the same importance with ourselves. So do you have a rough estimate for the proportion of capital expenditure for ourselves and our network partners? Thank you.</p>, <p><strong>Huiping Yan</strong> -- <em>Chief Financial Officer</em></p>, <p>Thank you for your question. Indeed, as you stated, this quarter, the past second quarter, we acquired and placed in service a lot of the increment of trucks and vehicles that we invested is around 2,100 or 2,200. So this is a one-time. But yeah, we believe investment in the infrastructure is one of our key strategies to build capacity in anticipation of the high-volume by incoming volume. The overall budget for capex spending is around RMB7 billion for this year. We think that is somewhere close to what we had previously talked about, RMB6 billion to RMB8 billion range. The investment by our network partners, yes, indeed are increasing. As we know, we invest in our own capacity, but because it is pickup, transit, sorting and delivery, all four aspects needs to be coordinated and in sync.</p>, <p>So a lot of our network partners are expanding their capabilities as well. Some of the figures I could provide you is that we have anticipated over 100 automation lines to be installed by our network partners. And so far, we have already seen the network partners invested over 50 of that. So toward the high season, we think the investment pace will pickup even further. Some of our larger network partners also invest in land and this is a long term investment, which again demonstrated their belief and the confidence in the future of the business together with us.</p>, <p><strong>Operator</strong></p>, <p>Thank you. This concludes our conference for today. I would like to turn the conference back to the company for any closing remarks.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-20722", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZTO"], "primary_tickers_companies": ["ZTO Express (Cayman) Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ZTO Express (ZTO) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 7, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-20722"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-20722", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-other", "tickers": "[\"\"]", "primary_tickers": ["ZTO"], "primary_tickers_companies": ["ZTO Express (Cayman) Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "ZTO Express (ZTO) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 7, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ZTO earnings call for the period ending June 30, 2020. | Good day and welcome to the ZTO Express Second Quarter Financial Results 2020 Conference Call and Webcast. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.\n I would now like to turn the conference over to Sophie Li, IR Director to read the Safe Harbor. Please go ahead, Sophie.\n Thank you, operator. Hello everyone and thank you for joining us today. The company's results and the Investor Relations presentation were released earlier today and are available on the company's IR website at ir.zto.com.\n On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer and Ms. Huiping Yan, Chief Financial Officer. Mr Lai will give a brief overview of the company's business operations and highlights followed by Ms. Yan who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows.\n I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations in the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.\n It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English.\n Thank you Meisong. Now please allow me to translate. Hello to everyone and thank you for joining us for today's earnings call. As the COVID-19 condition further stabilize, China experienced a healthy rebound in economic activities and a strong rally in domestic consumption during the second quarter of 2020. As such, China express delivery industry generated 5.64 billion incremental parcels and grew 36.7% year-over-year, which is the highest level of quarterly volume growth since 2017. As the industry leader, ZTO achieved a total of 4.6 billion parcels in the second quarter, representing 47.9% year-over-year growth and we expanded our leading market share to 21.5%. Meanwhile, we were able to maintain an improvement trend on quality of services and customer satisfaction while achieving high-volume growth.\n During the second quarter, we maintained our key strategy which is to accelerate volume growth, increase our lead and continue expanding our market share. When price competition intensified, we made necessary modifications to our network policies to boost the level of intensive and show of collaboration between pickup and delivery allies with fee balancing mechanism. In addition, we granted low or zero interest loans to selected network partners through ZTO Finance to provide cash flow relief. Amidst a competitive pressure withstood by our network partners to face challenges and look to the future, our network remained stable.\n Meanwhile, we furthered our effort to improve cost of productivity. Subsequent to the first quarter investment, we brought in roughly another 2,100 additional high-capacity vehicles, opened up 500 new line-haul routes and greatly reduced the use of third-party logistics services during the second quarter. The increased use of automation equipment and continuous functional upgrades allowed us to be less dependent to labor. New initiatives on improving timeliness such as process breakdown and separate monitoring enhanced the certainty and stability. As a result, our combined sorting and transportation costs per parcel declined by 17.1%. The continuous improvements in our operating efficiency tempered the impact of price competition. Despite intense competition, ZTO was able to balance among quality of services, market share and earnings as a combined result of strong consumption driven volume growth and a cost efficiency gain, which helped to offset the impact from ASP decline.\n We achieved an adjusted net income of RMB1.45 billion, which increased 5.6%. We believe in the positive growth prospect of the China express delivery industry. We also recognize that with the current market dynamics, where the leading scaled express delivery companies are relatively close in market share and competition becomes inevitable, we must focus on what we can do to gear up and widen our competitive lead in order to achieve absolute supremacy. Within the next two to three years, average daily parcel volume is likely to top over 300 million parcels and we must maintain a long-term vision and a focus on immediate task and work diligently to retain comprehensive revenue.\n Going forward, we will continue to focus on strengthening infrastructure across our entire network and improving operational efficiency through the following. First, developing our infrastructure to be capable of handling over 100 million daily volume in the near future. We will increase investment in self-owned facility and provide financing to support our network partners who will also increase their processing capability. We will gradually enhance the network structure through delayering and the streamlining, reducing the frequency of aggregation and sortation. Secondly, improve our operational efficiencies to consistently reduce unit cost in addition to skill leverage, enhanced resource planning and dispatch in line-haul transportation and raise the level of digitization and automation for sortation and advance toward building smart technology enabled logistic park.\n Thirdly, lay a strong foundation for multichannel last-mile express plus business model, further implement vendor front-line couriers fee structure, cultivate entrepreneurial initiative on one hand and accelerate development of last-mile post to secure delivery cost advantage and shorten the distance between product and consumers. Last but not least, accelerate design and the implementation of innovative products such as scheduled pickup, on-demand delivery and coaching services either catered toward consumers' individualized needs or for few logistic requirements for specialty goods and create differentiated product line and relevant processing capability. With brand awareness, develop consumer psyches to improve logistical experience.\n All above endeavors holds the key to us transforming from a leading express delivery company to an equal advantage comprehensive logistic service provider. And to accomplish that, technology and data analytics are instrumental. Apart from delivering results through our daily operations, our business managers are learning to monitor and analyze processes and associated result in order to identify problems and make necessary decisions accordingly.\n Quality of services, market share and profitability remains our strategic priorities. Sustained growth of our core express business will establish a strong moat for ZTO to transform into a world leading comprehensive logistics service provider and the development of our ecosystem is our passageway to achieve our mission. We have raised our guidance for the full year parcel volume to reach between 16.2 billion to 17 billion, a goal we will endeavor wholeheartedly to achieve. Given our scale today, it will not be difficult to obtain short term cost savings. However, we choose to focus on sustainability and a balanced interest of all our substitutes for long term win-win.\n We firmly believe that the China express delivery industry will continue to progress well. We are confident in our ability to seize the opportunity and win this marathon like race. Perhaps, the biggest challenges as well as the mightiest of strength lies with whether we and our partners can stay true to our intentions, focus on our common goals and maintain safe and confidence and deliver solid execution in every aspect.\n With that being said, let's turn to our CFO, Huiping Yan, to go through our financials.\n Thank you Chairman Lai and thank you Sophie. Hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentages changes refers to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website and I will highlight some of the key points here.\n Benefited from a strong rebound in e-commerce-driven consumption after the COVID-19 situation has been significantly contained within China, ZTO delivered a strong volume growth in the second quarter. Our parcel volume grew 47.9% to 4.6 billion and our market share expanded by 1.6 points to reach 21.5%.\n Total revenues increased by 18% to RMB6.4 billion. For core express delivery businesses, the ASP declined by RMB0.34 or 20.9% for the quarter, better than industry peers. It included RMB0.28 volume incentives as added support to our network partners in order to maintain and protect market share as well as keeping our network stable, RMB0.02 related to increased adoption of single sheet digital waybill and RMB0.02 declined due to parcel weight drop.\n Gross profit of RMB1.8 billion, which was relatively flat from last year. Gross profit margin decreased five points to 27.6% as a combined result of volume increase, unit price decline, as previously stated and cost productivity gain. Unit transportation costs declined 20.4% or RMB0.12 to RMB0.43, primarily due to increased number of self-owned high capacity trailer trucks. The decrease in diesel price and national toll-free policy that ended nearly toward the end of the May also contributed to cost decreases. Unit sorting costs declined 11.1% to RMB0.04 -- or RMB0.04 to RMB0.27 as a greater number of automated sorting equipment were placed in use, allowing a higher proportion of our parcels to be processed automatically instead of manually.\n SG&A increased by 2.3%. Excluding share-based compensation, SG&A as a percentage of total revenue decreased by 0.5 points to 4.9%, demonstrating positive operating leverage from our efficient corporate structure. Income from operations, excluding SBC, increased by 9.5% and associated margin declined 2 points which is narrower than the gross profit margin decline because of SG&A leverage and increased other operating income mainly consisted of government subsidies and tax rebates.\n Operating cash flow was RMB1.252 billion for second quarter, compared with RMB1.993 billion in the same period last year. The decrease resulted mainly from the increase in financing provided to our network partners and higher prepaid fuel and toll cost driven by larger self-owned fleet. Capex for the quarter was RMB2.25 billion, RMB1.44 billion higher than the same period last year as we increased investments such as adding over 2,100 high-capacity vehicles to further strengthen our infrastructure and capacity for anticipated volume increase in the core business.\n Now turning to our business outlook. Taking into consideration the current market condition, the negative impact from COVID-19, price competition and the company prioritized goal to achieve accelerated market share gain while maintaining our target level of earnings, we raised our 2020 annual parcel volume projection to be in the range of 16.2 billion to 17 billion, representing a 33.7% to 40.3% increase year-over-year. And we lowered the adjusted net income for 2020 to be in the range of RMB4.8 billion to RMB5.2 billion, representing a 1.7% to 9.3% decrease year-over-year. These estimates represent management's current and preliminary view, which are subject to change.\n This concludes our prepared remarks. Operator, please open the line for questions. Thank you.\n | ZTO Express | (NYSE:ZTO) | Aug 13, 2020 | 9:00 p.m. ET | 9 | pm | 2020-08-13 | 2020-08-14 | 2020-08-13 | 2020-08-17 | NYSE | Such statements are based on management's current expectations in the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. | Such statements are based on management's current expectations in the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. | [0.03669345 0.636368 0.32693857] | negative | -0.599674 | 2020-08-17 | 34.380001 | 34.439999 | 33.240002 | 33.669998 | 2590531.0 | 33.950001 | 34.139999 | 33.220001 | 33.660000 | 3027549.0 | Logistics & Transportation | 2020-06-30 | 2020-06-30 | 1.85 | 1.884660 | 2020-06-30 | ZTO | -0.034660 | miss | -0.720001 | decrease | 0 | positive |
| 601 | ZTS | /earnings/call-transcripts/2020/08/06/zoetis-inc-zts-q2-2020-earnings-call-transcript.aspx | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Zoetis Inc</strong> <span class="ticker" data-id="284413">(<a href="https://www.fool.com/quote/nyse/zoetis-inc/zts/">NYSE:ZTS</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:30 a.m. ET</em></p><h2>Contents:</h2>\n<ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>\n<h2>Prepared Remarks:</h2>\n<p><strong>Operator</strong></p><p>Welcome to the Second Quarter 2020 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial in or on the Investor Relations section of zoetis.com. [Operator Instructions]</p><p>It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.</p><p><strong>Steve Frank</strong> -- <em>Vice President of Investor Relations</em></p><p>Good morning, everyone. And welcome to the Zoetis Second Quarter 2020 Earnings Call. I'm joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections.</p><p>For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles, or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, August 6, 2020. We also cite operational results, which exclude the impact of foreign exchange.</p><p>With that I will turn the call over to Kristin.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Thank you, Steve. Good morning, everyone. I hope you and your loved ones remain safe and healthy as the COVID-19 pandemic continues to affect all of our professional and personal lives. On the call today, we will provide additional context around the impact of COVID-19 is having on our business, summarize the quarterly financial results, update you on our outlook and leave plenty of time to address your questions. In the second quarter, we delivered better-than-expected results given uncertainty around the COVID-19 pandemic. And I want to thank all of our Zoetis colleagues who have shown amazing resiliency, customer focus and perseverance throughout the year in a response to these challenging times.</p><p>In terms of numbers, our revenue grew 4% operationally, with the U.S. segment up 6% and International up 3%. Our companion animal products continue to drive our business performance, with 13% operational growth, while livestock products declined 5%. Our adjusted net income increased 4% operationally in the second quarter. We have built a very strong companion animal portfolio over the last several years based on our internal innovation. And these products helped offset some of the deeper market challenges in the livestock market today. Our recently launched parasiticides, Simparica Trio, ProHeart 12 and Revolution Plus as well as our key dermatology portfolio of Apoquel and Cytopoint, provide a solid foundation that has continued to perform well this year.</p><p>We continue to be very pleased with the performance of our new triple-combination parasiticide for dogs, Simparica Trio as well as the strength of the overall Simparica franchise. Glenn will share more details in his remarks. Our continued focus on meaningful innovation and the diversity of our portfolio across species, products and geographies remain core advantages for Zoetis during times of economic uncertainty. And we've also seen the essential nature of animal health playing an important role in the resiliency of our business and our industry at this time. In terms of COVID-19, our veterinary and producer customers are under increased pressure to deliver critical animal care and maintain a reliable global food supply, and we are fortunate to be able to support them in this mission.</p><p>We continue to put the safety of our colleagues and customers first during this pandemic, and we've been very pleased with our team's ability to maintain productivity, even with safety and social distancing adjustments at our facilities as well as the ongoing use of remote work arrangements for the majority of our colleagues. Our field force has returned to meeting with customers in many geographies based on local guidance and practices. We monitor and adapt these plans on a daily basis based on local feedback and adjustments in markets that may be experiencing increased COVID-19 cases. Our teams are excited to be back out with our customers, but we're also preserving the lessons we have learned from effective online interactions, webinars and e-commerce to evolve our sales and support.</p><p>In terms of supply chain, Zoetis has maintained a reliable inventory of critical medicines, vaccines and diagnostics to our customers and distributors in more than 100 markets around the world. And our research development programs remain on track in terms of filings, clinical trials and interactions with regulatory agencies. We remain confident in the progress of regulatory reviews of our monoclonal antibody candidates for pain in cats and dogs. Our submissions are proceeding as expected. This year continues to be uncharted territory due to COVID-19 and the related trends affecting our customers.</p><p>However, the underlying demand for healthy pets and a reliable source of protein remains fundamental to the global economy. In the second quarter, we benefited from the veterinary clinics in the U.S. recovering much more quickly from the COVID-19 impact than we anticipated. Veterinary practices in the U.S. adapted quickly to curbside visits and mobile clinics to deliver critical care and maintain relationships with their customers. We also saw an acceleration of companion animal product sales through e-commerce channels as a result of the lockdowns in many states. Veterinarians and pet owners are adapting more quickly to these online options as a way to fill prescriptions for parasiticides and other medicines. We also know people are spending more time at home with their pets. They may be observing conditions such as itchiness or pain, which have previously gone unnoticed. And so we are actually seeing an increase in spend per visit in U.S. clinics.</p><p>Meanwhile, outside the U.S., companion animal veterinary clinic performance has been in line with expectations despite wide market-by-market variations based on local dynamics. For Zoetis, we expect our overall revenue growth for the remainder of the year to be driven largely by companion animal products, especially our parasiticides and key dermatology portfolio. We plan to continue investing in direct-to-consumer advertising and digital marketing to support these products. Livestock is a very different picture and remains very challenged by the pandemic, especially in the U.S. Producers are adjusting to new market demands and distribution needs from foodservice and restaurant channels to more grocery and retail channels, while also managing ongoing labor, safety and trade issues.</p><p>As expected, U.S. livestock in the second quarter saw a significant downturn as we expect that to remain a challenge for the rest of the year. The pace of return to more foodservice and restaurant demand, along with increased export opportunities, will be the most significant factors in the recovery of livestock producers in the U.S. Internationally, livestock grew and performed in line with expectations across a diverse set of markets. We saw very positive results in places like China, where they're further along in their COVID-19 recovery, but we will be sensitive to see how Latin America and markets like Brazil perform in the remainder of the year due to COVID.</p><p>As we look ahead, we remain focused on advancing our five key priorities to ensure our long-term success, driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high-performing organization and championing a healthier, more sustainable future. We've continued to make important investments in products and innovations across the continuum of care from prediction and prevention to detection and treatment of disease, Supporting successful launches as well as new life cycle innovations and expansions of major products into new markets continue to be the cornerstones of our durable and steady performance. In the second quarter, we expanded major vaccine franchises with the approval of our Vanguard B Oral for dogs in Brazil and our Fostera Gold PCV MH and Fostera Gold PCVMetastim for vaccines for pigs in Australia.</p><p>We also continue to strengthen our diagnostic and digital capabilities, building on recent acquisitions in point-of-care and reference labs, along with additional investments. We plan to launch a new diagnostic platform for pet care in the third quarter called VetScan Imagyst. We are very excited about the potential for this disruptive innovation, which will be the first system to bring clinical pathology right to the point of care. This new multipurpose platform uses a combination of image recognition technology, algorithms and cloud-based artificial intelligence to deliver rapid testing results to the clinic. Its first indication will be for testing fecal samples for parasites, making it quick and easy to test and treat pets in the same visit.</p><p>We'll have more to say in the coming weeks as we prepare for a global launch. We also view diagnostics as playing an important role in the continuum of care for fish. In the second quarter, we acquired Fish Vet Group to add more diagnostic tools to our aquaculture portfolio, including environmental testing, which is critical to fish farming. Finally, at Zoetis, our key priority around high-performing teams is tied to creating a culture where all colleagues feel valued and included and is reflected in our commitment to promoting inclusion, diversity and equity across our organization.</p><p>Our leadership and Board are dedicated to being a force for positive change across the globe to drive greater equity and inclusion. And we have dedicated financial and people resources to do so. As part of this plan, we have made commitments to publish our diversity statistics and to increase our representation of black colleagues and people of color overall in the U.S. As the world leader in animal health, we are committed to demonstrating our leadership on this important business and social issue.</p><p>Now let me hand off to Glenn, who will speak more about our second quarter results and updated guidance for the full year. Glenn?</p><p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Thank you, Kristin, and good morning. I hope everyone is safe, healthy and adapting to what is certainly an unprecedented time for all of us. Today, I will provide additional commentary on our Q2 financial results, provide an update on our liquidity position and review our improved full year 2020 guidance. Beginning with the second quarter results. We generated revenue of $1.5 billion, which was flat on a reported basis and 4% growth operationally. Adjusted net income of $427 million decreased 2% on a reported basis and increased 4% operationally. Foreign exchange in the quarter had an unfavorable impact of 4% on revenue. This was driven primarily by the U.S. dollar strengthening against the Brazilian real, Australian dollar, Mexican peso and euro.</p><p>Operational revenue growth of 4% was driven by 2% price and 2% volume. Volume growth of 2% includes 3% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 5% in other in-line products. Companion animal products led the way in terms of species growth, growing 13% operationally, while livestock declined 5% operationally. Companion animal performance was driven by our parasiticide portfolio, which includes sales of Simparica Trio in the U.S., Canada and certain European markets and our key dermatology products, Apoquel and Cytopoint. Revenue from the acquisition of Platinum Performance and its nutritional products, acquired in the second half of 2019, drove the growth in equine. Livestock declines in the quarter were driven by challenges to our U.S. livestock portfolio.</p><p>Supply chain disruptions caused by reduced animal processing capacity and shifts in consumer demand from restaurant and foodservice to grocery stores affected our customers' purchasing decisions. This decline was partially offset by strong performance internationally with growth in swine, fish and poultry. New products contributed 3% to overall growth in the quarter, driven by Simparica Trio, ProHeart 12, Revolution Plus and our Alpha Flux parasiticide for salmon in Chile. We remain excited by the launch of Simparica Trio and are reaffirming the range of $100 million to $125 million for full year incremental revenue. While vet clinic penetration is occurring at a more moderate pace as a result of the COVID-19 pandemic, prescriptions in those clinics that have adopted</p><p>Trio have been more robust and cannibalization of Simparica has been less than we anticipated. Global sales of our key dermatology portfolio were $224 million in the quarter, growing 24% operationally and contributing 3% to overall revenue growth. Recent acquisitions contributed 1% growth this quarter, which includes Platinum Performance and our reference lab expansion strategy. Now let's discuss the revenue growth by segment for the quarter. U.S. revenue grew 6%, with companion animal products growing 19% and livestock products declining by 18%. Companion animal growth in the quarter was driven by sales of the Simparica franchise, our key dermatology products and the impact of recent acquisitions. U.S. key dermatology sales were $160 million for the quarter, growing 26%.</p><p>The continued strength of this portfolio was driven by expanded usage of both Cytopoint and Apoquel benefiting from our direct-to-consumer campaign, uptake in e-commerce channels and pet owners spending more time with their pets as a result of COVID-19. Simparica Trio performed well in the U.S. with sales of $36 million despite challenging market conditions in Q2. We are observing several positive trends, including rapid uptake in clinics that have adopted Trio, smaller-than-expected cannibalization of Simparica, sales coming from new patients to the category and taking share from current oral flea and tick competitors. Diagnostic sales increased 18% in the quarter, largely driven by our reference lab acquisitions. In addition, previous instrument placements created a solid foundation for consumables growth in the second quarter. U.S. livestock declined 18% in the quarter, driven by lower sales across all species.</p><p>In the second quarter, we faced challenges with significant declines in feedlot placements, reduced demand from the foodservice industry and the effects that had throughout the food supply chain and our customers, in addition to increased competition. To summarize, U.S. performance was strong in a difficult market environment. And the diversity of our portfolio, again, proved beneficial as growth in companion animal offset the challenges faced in the U.S. by our livestock portfolio. Our International segment had operational revenue growth of 3% in the second quarter, with more balanced performance across our companion animal and livestock portfolios. Companion animal operational revenue growth was 2% and livestock operational growth was 4%.</p><p>Increased sales in companion animal products was a result of growth in our key dermatology portfolio and our Simparica franchise, including the launch of Simparica Trio in Canada. While European markets were impacted significantly by COVID-19, the decline was offset by significant growth in other markets, including Japan and China. Diagnostics had a difficult quarter as wide-scale clinic closures resulting from COVID-19 limited the ability to place instruments and negatively impacted consumable usage. International livestock growth in the quarter was driven by swine, fish and poultry. Swine grew double digits in the quarter, primarily driven by China, which grew 25%, as key accounts continue to expand their herds and production shifts from smaller farms to larger-scale operations.</p><p>Our fish portfolio delivered another strong quarter. We saw favorable conditions in Chile and Norway that resulted in vaccinations being accelerated into Q2. In addition, we continue to see an uptake of the Alpha Flux parasiticide in Chile. Overall, our international segment was again a positive contributor to revenue growth, with performance in swine, companion animal, fish and poultry more than offsetting decline in cattle resulting from the COVID-19 pandemic. Now moving on to the rest of the P&L. Adjusted gross margin of 71.1% increased slightly on a reported basis compared to the prior year due to price, favorable manufacturing costs and product mix, which were partially offset by foreign exchange, recent acquisitions and higher inventory charges.</p><p>Adjusted operating expenses were flat operationally. The incremental advertising and promotion expenses related to Simparica Trio, recent acquisitions and R&D increases were largely offset by reductions to T&E and compensation-related costs as a result of COVID-19. The adjusted effective tax rate for the quarter was 22.3%. The increase versus prior year is driven by the jurisdictional mix of earnings and the impact of discrete tax benefits recorded in Q2 2019. Adjusted net income for the quarter grew 4% operationally, primarily driven by revenue growth, and adjusted diluted EPS grew 6% operationally. Next, I'd like to cover our liquidity position and our capital allocation priorities. We ended the second quarter with approximately $3.4 billion in cash and cash equivalents, including the proceeds from our $1.25 billion long-term debt issuance in May, of which $500 million is earmarked for repayment of our November 2020 maturity.</p><p>We have access to a $1 billion revolving credit facility and a coinciding commercial paper program, both of which remain undrawn. Given our strong cash flow and balance sheet, we remain committed to our capital allocation priorities for internal investment, M&A and returning excess cash to shareholders. Consistent with what I mentioned last quarter, we still anticipate elevated capital expenditures this year to support investments in manufacturing, information technology to support our recent acquisitions and capabilities in digital and data analytics. With regard to returning excess cash to shareholders, we remain committed to our 2020 dividend, which represents a 22% increase over 2019. In Q1, we repurchased $250 million in Zoetis shares before suspending the program in the second quarter in order to conserve cash. We have approximately $1.4 billion remaining under our multiyear share repurchase program.</p><p>Now moving on to our updated guidance assumptions for 2020. Our past performance has always given us confidence that the essential nature of our business, our diverse portfolio and the innovation we consistently bring to our customers would position us well during difficult market conditions. After assessing recent trends and our performance in the second quarter, we are further refining and raising our full year 2020 guidance. We expect recent positive companion animal trends in the U.S. will continue, although vet clinic revenue may moderate somewhat as pent-up demand works its way through the system. Alternatively, we believe social distancing measures are negatively impacting the foodservice recovery and will continue to present challenges to our livestock business in the U.S.</p><p>The more recent resurgence of COVID-19 cases in parts of the U.S., and expanding rates of infection in international markets continues to create uncertainty around the duration, scope and economic impact of the pandemic. Please note that our guidance reflects foreign exchange rates as of mid-July. And given our global footprint, movement in foreign exchange has had an impact on revenue and adjusted net income since we issued our prior guidance in May. Our current guidance includes favorable foreign exchange revenue of approximately $50 million and approximately $10 million at adjusted net income versus May guidance. For revenue, we are raising and narrowing our guidance range with projected revenue now between $6.3 billion and $6.475 billion and operational revenue growth of between 3% and 6% for the full year versus a negative 2% to positive 3% we had in our May guidance.</p><p>Adjusted net income is now expected to be in the range of between $1.685 billion and $1.765 billion, representing operational growth, a positive 1% to positive 5% compared to our prior guidance of negative 9% to negative 2%. Adjusted diluted EPS is now expected to be in the range of $3.52 to $3.68 and reported diluted EPS to be in the range of $3.14 to $3.32. In closing, while the COVID-19 pandemic has certainly presented a set of challenges we have not seen in the past, we are extremely proud of our colleagues and the commitments they have shown toward our customers, our company and animal healthcare. During this time, we have demonstrated the diversity and durability of our portfolio, the resiliency of our industry. And we have confidence in our ability to continue to execute on our strategy during these uncertain times.</p><p>Now I'll hand things over to the operator to open the line for your questions. Operator?</p><div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-26874">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-26874');\n });\n </script>\n</div>\n</div><h2>Questions and Answers:</h2><p><strong>Operator</strong></p><p>[Operator Instructions] We'll take our first question from Jon Block with Stifel. Please go ahead.</p><p><strong>Jon Block</strong> -- <em>Stifel -- Analyst</em></p><p>Hey, thanks guys. Great. I guess I'll try to just load everything upfront. Glenn, I think op margins were at an all-time high in the midst of a global pandemic, so congrats. But some of that was likely eaten by mix. Yet, it seems like that mix may remain, as you mentioned, intact or favorable for the next couple of quarters. So as we think about margins into the back part of the year, is there anything to call out overall? And what about the cadence of 3Q versus 4Q?</p><p>Kristin, for you, just to shift over there, maybe if you can just talk to what you're seeing for a competitive response on Trio? And just a clarification, the new platform for diagnostics of the new offering, is that an entirely new VetScan analyzer that displaces the old one? Or is it a different unit specific for pathology? A lot there. But thanks for your time.</p><p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Okay. So Jon, I'll just address the first part of your question with operating margins and mix. So as you say, we have very favorable gross margin in this quarter as well as the first half of the year. As we look into the second half of the year, we do expect there to be some deterioration in gross margin. And that does come from product mix, right? The separation that we've seen in performance in the quarter, livestock declined 5% operationally. Companion animal growth grew 13%. We expect that to narrow in the second half of the year, the differential in performance between companion animal and livestock.</p><p>So that will negatively impact mix. The other component is that we generally have a larger portion of livestock sales in the second half of the year than we do have in the first half of the year. The other component to consider is opex, right? As we move into the second half of the year and our field returns more and more to visiting clinics, T&E expenses, which has been very favorable, particularly in Q2, will rise as we go into Q3 and Q4. In terms of the dynamics between Q3 and Q4, don't really see any big differential in terms of the dynamics between Q3 and Q4.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Okay. Jon, with regards to your question on competitive response to Trio. It's been the response that we largely expected. Obviously, this is an innovative product. They were very aware it was coming. They're obviously running promotions. You probably saw some stock-ins as we probably saw as you move from Q1 to Q2, but we're really not seeing anything that we weren't expecting overall. And to address your other question with regards to Imagyst, it's a completely separate product. It is actually a scanner and a microscope that then uploads to the cloud for analysis. So it is completely separate than VetScan. And it's a platform. And the first product, as we mentioned, will be around fecal but it is not a replacement at all of the VetScan machine. It's a separate one that is both a scanner and a microscope.</p><p><strong>Operator</strong></p><p>And our next question comes from John Kreger with William Blair. Please go ahead.</p><p><strong>Jon Kaufman</strong> -- <em>William Blair -- Analyst</em></p><p>Hi, good morning. This is Jon Kaufman on for Kreger. I'd like to focus a little bit on livestock here. It'd be great to get a sense of your expectation for what the outlook looks like, not just in the coming quarter or two, but really into 2021 and over the medium term. So I guess a couple of questions within that. First, how much of a residual impact will the processing capacity issues have? And then second, on the lower foodservice demand, let's just say, hypothetically, the U.S. consumer really isn't ready to go out to restaurants until spring or summer of 2021, do you expect producers to exit and then you're serving a smaller end market? Or is it more of producers realize this is a period of limited profitability, but they don't adjust herd sizes and they stay in the market? Thank you.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure. Thanks, Jon. A few things on that. I think the two big trends you're seeing in U.S. livestock and I say you have to look at livestock. 60% of our livestock business is actually outside the U.S. And it grew at 4%. So again, this speaks to the diversity of our portfolio. But if you look at the sort of global trends you're talking about with regards to the movement from eating out to eating in, we do expect that to continue. And the guidance we've given for the rest of the year is that, that largely doesn't change too dramatically. It's obviously too early to tell in 2021 how that ultimately adjusts. The second factor to consider in the livestock overall is the packing plants, which have been an issue in the U.S. Packing plant capacity in the U.S. still looks to be about 95% to 97%.</p><p>And in some businesses, that may be good, but that does continue to back up animals. But again, this is mostly a U.S. trend, although we have seen a few isolated issues outside of the U.S. and Europe, Australia and some other markets. But again, I think what producers are doing are doing their best to actually alter where they can the flow of animals. This is much easier for poultry to do, given they only have to make decisions on 45 days. Pigs can do it over six months. So I think you will see a slight reduction in the U.S. in pork. It is much harder for cattle producers. Most of the animals are already here. So we do see cattle probably continuing to struggle probably through the first half of next year.</p><p>But I think the third factor besides the dine in, dine out and packing plants to consider is actually the export market. What has really helped maintain a lot of the U.S. livestock flows has been the export market, with the largest player there clearly being China. And given ASF, they are still in need of a tremendous amount of pork. So those are the three factors that we're considering that gives us confidence that, to your question, in the short to medium term, in general, livestock has grown around 5%. Obviously, it's been a little lower in the last few years. And I think, again, International was 4%. We were negative in the U.S. We do think in the medium term, it goes back to normal levels, but we do think livestock will continue to be challenged certainly this year and likely at least to the first half of next year. Thanks, Jon.</p><p><strong>Operator</strong></p><p>Our next question comes from Michael Ryskin with Bank of America.</p><p><strong>Michael Ryskin</strong> -- <em>Bank of America -- Analyst</em></p><p>Hi. And thanks for taking the question. Just two sort of quick ones for me. First, on the guide, for revenues and guidance of 3% to 6% core growth. I just want to make sure I'm not missing anything. You did 4% in the second quarter, you're over 5% year-to-date, or end of the range actually implies pretty meaningful deceleration from the second quarter, and yet most trends are pointing upwards. So I'm just wondering if you could go into that sort of what points you to 3%, what points you to 6%. When you guided in the first quarter you talked about a second wave in the fall and winter. Is something like that in your assumptions now? Or is there anything underlying going on there?</p><p>And then the second question, again, on the digital VetScan pathology instrument you talked about. Just a little bit of a follow-up. Is it an instrument-only product? Will there be consumables attached to it. And are you planning any different rollout in the U.S. versus International?</p><p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>So Mike, just in terms of your first question in terms of the guidance in revenue of the 3% to 6% growth. So to your point, in the first half, we grew 5% with a limited impact from COVID-19 in Q1. That would imply a second half of 2% to 7% growth essentially. I think, a, it's first important to understand that, in the first half, that 5% growth did have a contribution from acquisitions of about 1%, which we won't have that same contribution in the second half of the year because of when the timing of those acquisitions occurred last year. So that really brings you to organic growth of about 4% in the first half of the year, which is the real comparator for that implied 2% to 7% growth in the second half of the year.</p><p>So really pretty balanced between first half and second half organically, with the first quarter not really having a significant impact from COVID-19. To your question about what brings you to the low end of the range, that would be a more severe impact of COVID-19 than we're seeing today across our markets. What takes you to the higher end of that range is things sort of stabilizing as they are for the rest of the year without a more rapid or more significant impact of COVID-19.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure. And to take the second half of your question, Mike, on Imagyst, we will be launching the U.S. and a few markets outside of the U.S. as we move into the end of Q3 to Q4. And there are consumables, but the consumable the consumables, obviously, reagents there, but there's also a read. So obviously, with every test that's done, the read that's done in the cloud is also a fee. So there are both some products you use to prepare the specimen. But there's also more importantly, the read of each test in the cloud. So it's a consumable, I suppose, but it's almost like a different way of looking at it, which is a cost per read. I hope that answers it. Thanks, Mike.</p><p><strong>Operator</strong></p><p>Our next question comes from Chris Schott with JPMorgan. Please go ahead.</p><p><strong>Analyst</strong></p><p>[Technical Issues] for Chris. And the first one is on African Swine Fever. You've touched upon this in your prepared remarks, but talk about where we are in terms of the recovery in China. How much of the herd has been rebuilt? And would you expect this to represent a tailwind in the second half of the year?</p><p>And then another one on livestock. It seems a part of the dynamic that COVID is creating is producers switching to lower-cost alternatives. To what extent is this happening? And how sticky do you think this dynamic is as we think about recovery in 2021 and beyond? Thank you.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure. So we'll start with your question with regard to African Swine Fever in China. What we've been seeing in China overall is that the larger, more sophisticated integrated producers are starting to rebuild their herd. As you saw, very strong growth in our China business of 24%. What you're seeing underlying this is the beginning of the rebuild of these herds. This is more isolated to sophisticated producers who can ensure biosecurity. Because to be clear, there's still African Swine Fever present in China. So I think what you're seeing is some of the smaller backyard producers are not rebuilding there, but we are seeing some of the more sophisticated ones doing so. And that is a positive trend for us because they would be more likely to use our products overall.</p><p>But if you look at African Swine Fever, we are still predicting that China will have to continue to import pork, a significant amount for the next few years. So this rebuild is slow because, as I said, there is still African Swine Fever in China and a few isolated markets as well outside of China. So I suppose, if you look at that, for China, it will continue to be a tailwind for us, continuing to drive the China business as that herd rebuilds. And with regard to your second question on livestock and whether we're some people are switching to lower-cost alternatives. Historically, that has been the case. So people will trade down. What's slightly different is that this is a pandemic with a recession.</p><p>And I say that because, as long as there's more protein than people need, the price goes down. So hamburger meat right now is actually still pretty cheap. So historically, we would see in a recession, people trade down from beef to pork to chicken's egg. So we think that's still a longer-term trend. But with the disruption right now and the overcapacity, you are still seeing some other proteins still in certain markets on a relative basis not be that expensive. So I think it's I would say your overall hypothesis over the medium to long term is true, although in certain markets, given overcapacity, the difference in price is not as dramatic as it normally is.</p><p><strong>Operator</strong></p><p>And we'll take our next question comes from Louise Chen with Cantor. Please go ahead.</p><p><strong>Louise Chen</strong> -- <em>Cantor -- Analyst</em></p><p>Hi, thanks for taking my question. So I wanted to ask you how COVID-19 has changed the way you do business on both the livestock and companion animal side? What efficiencies have emerged? And what could be here to stay? Thank you.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure. Thanks, Louise. I mean I think similar to all businesses, we are we've had to adjust the way we operate, and I've been incredibly impressed as the resilience of our colleagues and our customers and their creativity. So the first trend is we've obviously moved a lot more to doing virtual seminars or webinars to handling orders and things like that by phone. Our customers have adopted to more telemedicine in certain markets around the world. And if you look at more broadly in the U.S. and in certain markets outside the U.S. to e-commerce. So that is, obviously, for us, it's supporting our producers, our veterinarians and pet owners to make sure they can access our products wherever they need.</p><p>But I think some of the skills that our field force is now learning will be one that will help us in the future, obviously reduce some of the travel that some of them had to do. But our field force across the world, where businesses are allowing, are actually back seeing customers. Now it's not as many customers as they saw before in a day, and that has to be both a customer and a colleague feeling comfortable in a given market. But it also has to flex, obviously, given some of the flare-ups in the U.S. geographically and across the world, a lot more flexibility there. So I think it's both our customers getting creative and flexible and our field force and some of our capabilities overall as a company to be able to meet our customers where they are. So I think I'm quite impressed at how our colleagues and our customers have adapted.</p><p><strong>Operator</strong></p><p>Our next question comes from David Westenberg from Guggenheim. Please go ahead.</p><p><strong>David Westenberg</strong> -- <em>Guggenheim -- Analyst</em></p><p>Hi, thanks for taking the questions and congrats on a great quarter. So for my first question, are you anticipating any kind of competitive launch in derm in the next year, say, 2021? I know we've heard about potential competitive launches for five probably five years now, but this time, it kind of feels a little bit different. And then for my second question was on the diagnostic platform. Is there any limitation to the sample type, say, blood, fecal, urine, even maybe physical tissue, etc.? And is there a component that might have a reagent to it? Thank you.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure, sure. So I'll start, David, with your first question on the derm portfolio. We were obviously quite pleased with this performance in the quarter, growing 24%. This is now obviously a blockbuster product as well as category. And to your point, we have expected competition for a while given the attractiveness of the sector. At this point in time, we have very little intelligence, as you know, in our industry with regards to competitive launches. But based on what we know today, we are not expecting a competitive launch in the rest of 2020 and likely the first half of 2021. Obviously, that's always subject to change since we don't know exactly what our competitors are doing, but we continue to believe that we will have competition in the space. But we, at this point, do not believe it's in the next six to 12 months.</p><p>So our focus right now in our derm portfolio is building those brands as big as we can. And as you saw in the quarter, our focus on direct-to-consumer advertising in the U.S. to continue to grow our share and to build the market itself. So your second question with regards to the platform, the Imagyst platform, what we're saying is it's the first fecal will be the first. Obviously, it could look at lots of others. I mean that's still a product that is still in our research and development to look at other types such as, obviously, blood and other types. But those are not things we are prepared at this point to discuss. But obviously, the platform lends itself to be able to do multiple different tissue types. Thanks so much.</p><p><strong>Operator</strong></p><p>Our next question comes from Balaji Prasad from Barclays. Please go ahead.</p><p><strong>Balaji Prasad</strong> -- <em>Barclays -- Analyst</em></p><p>Hi, good morning and thanks for taking my question. So two parts. Firstly, Kristin, there's a material change in the competitive landscape with the new number two company. So I would like to understand your thoughts on what the Elanco and Bayer merger means for the industry and for Zoetis specifically as the number one company?</p><p>Secondly, you've been championing technology adoption of the firm. So I want to explore one of the priority areas mentioned, digital and data analytics. And what does this mean in actual terms? Is it a revenue driver? Is it an operational efficiency measure or a mix of both? Thank you.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure. Thanks, Balaji. For starters on the combination of Elanco and Bayer. As we said previously, we don't really see this as changing the competitive landscape in any dramatic way. We've competed against both of them many times before. Obviously, the acquisition of Bayer by Elanco will increase their business in the OTC space, where we, honestly, don't really operate. We do in the direct-to-consumer side, but not in the over-the-counter. So it's not a space that's important to us, especially with our focus on the veterinarian, where that's more of a retail market there. So we don't foresee that changing it. They've both have been well-capitalized competitors historically. So we don't see that as a major change. With regards to digital and data analytics, I think it's an and, it's both.</p><p>It is both a revenue driver, as we announced today, with Imagyst certainly looking at products that drive revenues such as platforms such as that. We've also spoken about precision livestock farming. So there's a numbers of ways in both companion animal and livestock, that this continues to help us drive revenue in but it's also an area where we can also be much more efficient, better targeting our customers, looking at new ways through e-commerce and other channels. We've done some quite exciting things. In China, for example, launching our own Revolution pets there and leveraging different tools in digital and data to just also make us more efficient, so to drive revenue and just increase our efficiency. So I think it's both. Thanks Balaji.</p><p><strong>Operator</strong></p><p>Our next question comes from Nathan Rich with Goldman Sachs. Please go ahead.</p><p><strong>Nathan Rich</strong> -- <em>Goldman Sachs -- Analyst</em></p><p>Good morning, thanks for the question. I wanted to start with Simparica Trio. You mentioned the clinic penetration is occurring, I think, at a more moderate pace than what you initially anticipated. Kristin, it'd just be great to get your view on kind of what you've seen so far and maybe what factors have had the biggest impact on pace of uptake? And do you think that we'll see this typical seasonality that you usually see in the parasiticide business? Obviously, a lot different about this year than maybe past year. And then the second question, if I could just ask it upfront. On the vet channel overall, how much of the strength do you think kind of might be backlog or pent-up demand versus what might be more sustainable as we think about trends in that part of your business over the over the balance of the year?</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Thanks, Nathan. So as we look at Trio, we started shipping to distribution in late March and launched the product in April right at probably the height of the pandemic, at least in the U.S. What we've seen to date is that, that it was more difficult for clinics to take on new products. That's often something that requires an in-person meeting, training of staff, etc. So we saw a slight versus what we expected, fewer penetration of clinics. But what we've been incredibly pleased about, and it's why we've given the guidance of $100 million to $125 million is that for the we've been quite successful in corporate accounts, ones that we engaged quite early on this, larger clinics. And the ones we penetrated, our share in those clinics has grown faster than we expected.</p><p>So I think that's been a positive. So again, we're continuing to grow our penetration of clinics, but we're quite pleased with the share. And what we're also pleased about is it has less of an impact certainly in cannibalizing Simparica, which has been great. So we've certainly taken share from others. But our data also suggests we're also getting new people back to the category of oral parasiticides, which we think is pretty exciting there. So I think whether this will be a typical season, if you look at some of the data with regards to vet visits, Q2 year-over-year, they're still down, I think, about 3%, but it's a significant improvement from the negative 20 to negative 30 you saw in the U.S. in the beginning of the quarter.</p><p>But what's really interesting and what might affect your question there is that the spend per visit, however, is up dramatically. So latest data, I will say, it's maybe up about 7%. We do think that's going to moderate over time. This is probably people buying more of the products so they don't have to return to the vet in case there's something. So we do expect that to moderate some in the coming quarters, but that might mean that people may, versus the normal historical six months, six or so, six or seven months of buying a parasiticide, maybe they bought more. So we'll see how that goes, but we are expecting that to moderate. So I think, overall, we're looking for continued positive trends in companion animal, but I think it will be dependent geography by geography.</p><p><strong>Operator</strong></p><p>And our next question comes from Kathy Miner with Cowen & Company. Please go ahead.</p><p><strong>Kathy Miner</strong> -- <em>Cowen and Company -- Analyst</em></p><p>Thank you, good morning guys. I have two questions. First, just going back to the dermatology business. Given that we've talked about the trends were good and people are staying home with their pets more, could we anticipate greater near-term sales for both Apoquel and Cytopoint? And would this be true in both the U.S. and OUS?</p><p>Second question just on companion animal vaccines. When you talk about the vet visits and the greater revenue per visit, have you seen a catch-up in vaccines? And is this still working its way through the system? Or do you think we're already there? And just a clarification on the share repurchase, I just want to clarify that is, in fact, still on hold. Thank you.</p><p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Yes. So Kathy, I'll take the questions on dermatology and on share repurchase. So in terms of the derm portfolio, if you look back to last year, we had over $750 million in sales, and we grew 29%, right? Obviously, with a bigger base of revenue, we were expecting that growth rate to slow down. When you look at year-to-date, however, we've grown 25%, and that has exceeded our expectations. And there's been a number of drivers in that. We've continued to invest behind the portfolio to drive growth, and we've seen a very positive return on that.</p><p>So we do expect to see better-than-expected performance in the derm portfolio than we would have when we started out the year, which is really pretty impressive, considering the impact of COVID-19 as well. And it's a franchise that we will continue to make sure that we invest behind the growth then. In terms of share repurchase, we did mention on the last call that we were suspending our share repurchase for Q2. We are also suspending for Q3, and we'll continue to evaluate that throughout the year.</p><p><strong>Operator</strong></p><p>Our next question comes from Gregg Gilbert with Truist Securities. Please go ahead.</p><p><strong>Gregg Gilbert</strong> -- <em>Truist Securities -- Analyst</em></p><p>Thanks, Chris, another question. I'm sorry if this came up, I don't think it did. But about insurance, both the company's involvement in and then a broader industry question. So first question is, what have you learned about pet insurance and what went well and what did not go so well in your launch in that space? And separate from Zoetis' involvement in that space, longer term, do you see broader-based interest in pet owners buying insurance? It seems like everyone with pets sort of gripes about. They're out-of-pocket yet utilization of insurance is quite low. Do you think that's an employer-mediated phenomenon that needs to be jump-started? Or what are your thoughts on increasing penetration of insurance in the pet space over time? Thanks.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure. Thanks, Gregg. When we entered the space, it was really about assisting the pet owner and getting the care and increasing access to care and supporting the vets and providing the best care they can. And oftentimes, one of the challenges there is the sort of unexpected expense, so our focus really has been in this to get a product that's more attractive to the consumer. So to your point, the U.S. versus the rest of the world is underpenetrated in pet insurance. But we think the primary reason there is not because of employers or anything other than we think some of the products have not been as attractive to pet owners. So we really felt that the way we launched this, the focus on the pet owner, would be attractive. We are pleased with our performance to date of our product with regards to Pumpkin, which is our pet insurance.</p><p>As we look at that, what's going to drive that and what's feedback, we did get some feedback from veterinarians and they had concerns with regards to the inclusion of parasiticide. So we did change the that program a little bit to look focus more on diagnostics. And this is part of continuing to launch a new product, and we iterate with our customers, both the pet owners and vets, to make it as attractive as we can. This is still a very, very small business relative to the rest of our business, to be perfectly honest with you. It's not totally material, but we are very pleased with how the company has been doing to date and most specifically in the number of new policies they continue to attract. And our goal is that we can make insurance grow the overall market, which is not hard to do since in the U.S., I think it's only 2% to 3% versus other markets outside the U.S. We'll take our next question from Navin Jacob with UBS. Please go ahead.</p><p><strong>Prakhar Agrawal</strong> -- <em>UBS -- Analyst</em></p><p>Hi. This is Prakhar Agrawal on behalf of Navin Jacob. My first question is on your clean antibodies. How do you see these products being differentiated versus some of your competitors such as Elanco's Galliprant? And how are you thinking about the market opportunity here? And second question is did increase in alternative channels have a material impact on your margins this quarter? And longer term, with continued increase in alternative channels, how should we think about the impact on your margin profile? Thank you.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Sure. I'll start with the first question on the monoclonal antibodies, and I'll let Glenn take the second question with regards to the alternative channels. Obviously, we don't have an approved product. So it's hard to say exactly how it would stack up. But the focus on monoclonal antibodies is really a focus on a product with strong efficacy, with a strong safety profile and these are large markets, for example, in the canine space. We think that sort of have gotten really comfortable with monoclonal antibodies, as is evidenced by our performance on Cytopoint. It really also addresses the strong compliance issue, which is you remember to give the product to your dog every day.</p><p>But I would say, if you think about the feline or the cat monoclonal antibodies, there really aren't any products out there today in the cat space. So we think this is quite innovative in the cat monoclonal antibody space with really very little existing products that cat owners or vets can use. So we're quite excited. But until we have a profile, it will be hard to say very specifically. But certainly, from a compliance and safety perspective and efficacy, we think these will be very strong products that we think both vet and pet owners will be quite excited about. So Glenn, do you want to take the second question?</p><p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p>Sure. So in terms of the impact of alternative channels on our margins, it did not have a material impact. And that's just based on the overall size of our sales in those channels, right? It really is limited to our U.S. companion animal business. So while the channel has expanded significantly in the quarter, it still represents less than 3% of our sales. So it's still not a big impact on the overall margin. But just to give a sense of the growth that we have seen, in 2019, in our U.S. companion animal business, the alternative channels represented about $100 million of sales for the year. In this quarter alone in Q2, that number was about $50 million. So that gives you a sense of the rapid increase we're seeing in these channels, but it's still small of an overall portion of our business to really impact our overall margins.</p><p><strong>Operator</strong></p><p>And there does appear to be no further questions at this time. And I'll turn the call back over to the speakers for any additional remarks.</p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p>Okay. Well, thanks, everybody. I want to thank you for your questions and for your continued interest in Zoetis. While there's still many uncertainties around the impact and the resolution of COVID-19, the fundamental strength of our business and industry, we believe, are proven and unchanged. And we remain very confident what Zoetis can achieve this year based on the diversity of our portfolio, the resiliency of our business and certainly the spirit of our colleagues. So thanks for joining us today.</p><p><strong>Operator</strong></p><p>[Operator Closing Remarks]</p><p><strong>Duration: 54 minutes</strong></p><h2>Call participants:</h2><p><strong>Steve Frank</strong> -- <em>Vice President of Investor Relations</em></p><p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p><p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p><p><strong>Jon Block</strong> -- <em>Stifel -- Analyst</em></p><p><strong>Jon Kaufman</strong> -- <em>William Blair -- Analyst</em></p><p><strong>Michael Ryskin</strong> -- <em>Bank of America -- Analyst</em></p><p><strong>Analyst</strong></p><p><strong>Louise Chen</strong> -- <em>Cantor -- Analyst</em></p><p><strong>David Westenberg</strong> -- <em>Guggenheim -- Analyst</em></p><p><strong>Balaji Prasad</strong> -- <em>Barclays -- Analyst</em></p><p><strong>Nathan Rich</strong> -- <em>Goldman Sachs -- Analyst</em></p><p><strong>Kathy Miner</strong> -- <em>Cowen and Company -- Analyst</em></p><p><strong>Gregg Gilbert</strong> -- <em>Truist Securities -- Analyst</em></p><p><strong>Prakhar Agrawal</strong> -- <em>UBS -- Analyst</em></p><p></p>\n<p><a href="https://www.fool.com/quote/zts">More ZTS analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n<p>\n<a href="https://www.alphastreet.com" rel="nofollow noopener norefferer" target="_blank">\n<img alt="AlphaStreet Logo" class="original-image-src" src="https://g.foolcdn.com/misc-assets/banner-2b-ff.jpg"/>\n</a>\n</p>\n<div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zoetis Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZoetis%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=1eaeb776-8526-4ffa-b20c-a1944f1ce61c">ten best stocks</a></strong> for investors to buy right now… and Zoetis Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZoetis%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=1eaeb776-8526-4ffa-b20c-a1944f1ce61c" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of Zoetis. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of Zoetis. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-26060", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZTS"], "primary_tickers_companies": ["Zoetis Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zoetis Inc (ZTS) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 94, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-26060"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-26060", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZTS"], "primary_tickers_companies": ["Zoetis Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zoetis Inc (ZTS) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 94, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ZTS earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Zoetis Inc</strong> <span class="ticker" data-id="284413">(<a href="https://www.fool.com/quote/nyse/zoetis-inc/zts/">NYSE:ZTS</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Aug 6, 2020</span>, <em id="time">8:30 a.m. ET</em></p>, <h2>Contents:</h2>, \n, <ul>\n<li>Prepared Remarks</li>\n<li>Questions and Answers</li>\n<li>Call Participants</li>\n</ul>, \n, <h2>Prepared Remarks:</h2>, \n, <p><strong>Operator</strong></p>, <p>Welcome to the Second Quarter 2020 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial in or on the Investor Relations section of zoetis.com. [Operator Instructions]</p>, <p>It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.</p>, <p><strong>Steve Frank</strong> -- <em>Vice President of Investor Relations</em></p>, <p>Good morning, everyone. And welcome to the Zoetis Second Quarter 2020 Earnings Call. I'm joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections.</p>, <p>For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles, or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, August 6, 2020. We also cite operational results, which exclude the impact of foreign exchange.</p>, <p>With that I will turn the call over to Kristin.</p>, <p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p>, <p>Thank you, Steve. Good morning, everyone. I hope you and your loved ones remain safe and healthy as the COVID-19 pandemic continues to affect all of our professional and personal lives. On the call today, we will provide additional context around the impact of COVID-19 is having on our business, summarize the quarterly financial results, update you on our outlook and leave plenty of time to address your questions. In the second quarter, we delivered better-than-expected results given uncertainty around the COVID-19 pandemic. And I want to thank all of our Zoetis colleagues who have shown amazing resiliency, customer focus and perseverance throughout the year in a response to these challenging times.</p>, <p>In terms of numbers, our revenue grew 4% operationally, with the U.S. segment up 6% and International up 3%. Our companion animal products continue to drive our business performance, with 13% operational growth, while livestock products declined 5%. Our adjusted net income increased 4% operationally in the second quarter. We have built a very strong companion animal portfolio over the last several years based on our internal innovation. And these products helped offset some of the deeper market challenges in the livestock market today. Our recently launched parasiticides, Simparica Trio, ProHeart 12 and Revolution Plus as well as our key dermatology portfolio of Apoquel and Cytopoint, provide a solid foundation that has continued to perform well this year.</p>, <p>We continue to be very pleased with the performance of our new triple-combination parasiticide for dogs, Simparica Trio as well as the strength of the overall Simparica franchise. Glenn will share more details in his remarks. Our continued focus on meaningful innovation and the diversity of our portfolio across species, products and geographies remain core advantages for Zoetis during times of economic uncertainty. And we've also seen the essential nature of animal health playing an important role in the resiliency of our business and our industry at this time. In terms of COVID-19, our veterinary and producer customers are under increased pressure to deliver critical animal care and maintain a reliable global food supply, and we are fortunate to be able to support them in this mission.</p>, <p>We continue to put the safety of our colleagues and customers first during this pandemic, and we've been very pleased with our team's ability to maintain productivity, even with safety and social distancing adjustments at our facilities as well as the ongoing use of remote work arrangements for the majority of our colleagues. Our field force has returned to meeting with customers in many geographies based on local guidance and practices. We monitor and adapt these plans on a daily basis based on local feedback and adjustments in markets that may be experiencing increased COVID-19 cases. Our teams are excited to be back out with our customers, but we're also preserving the lessons we have learned from effective online interactions, webinars and e-commerce to evolve our sales and support.</p>, <p>In terms of supply chain, Zoetis has maintained a reliable inventory of critical medicines, vaccines and diagnostics to our customers and distributors in more than 100 markets around the world. And our research development programs remain on track in terms of filings, clinical trials and interactions with regulatory agencies. We remain confident in the progress of regulatory reviews of our monoclonal antibody candidates for pain in cats and dogs. Our submissions are proceeding as expected. This year continues to be uncharted territory due to COVID-19 and the related trends affecting our customers.</p>, <p>However, the underlying demand for healthy pets and a reliable source of protein remains fundamental to the global economy. In the second quarter, we benefited from the veterinary clinics in the U.S. recovering much more quickly from the COVID-19 impact than we anticipated. Veterinary practices in the U.S. adapted quickly to curbside visits and mobile clinics to deliver critical care and maintain relationships with their customers. We also saw an acceleration of companion animal product sales through e-commerce channels as a result of the lockdowns in many states. Veterinarians and pet owners are adapting more quickly to these online options as a way to fill prescriptions for parasiticides and other medicines. We also know people are spending more time at home with their pets. They may be observing conditions such as itchiness or pain, which have previously gone unnoticed. And so we are actually seeing an increase in spend per visit in U.S. clinics.</p>, <p>Meanwhile, outside the U.S., companion animal veterinary clinic performance has been in line with expectations despite wide market-by-market variations based on local dynamics. For Zoetis, we expect our overall revenue growth for the remainder of the year to be driven largely by companion animal products, especially our parasiticides and key dermatology portfolio. We plan to continue investing in direct-to-consumer advertising and digital marketing to support these products. Livestock is a very different picture and remains very challenged by the pandemic, especially in the U.S. Producers are adjusting to new market demands and distribution needs from foodservice and restaurant channels to more grocery and retail channels, while also managing ongoing labor, safety and trade issues.</p>, <p>As expected, U.S. livestock in the second quarter saw a significant downturn as we expect that to remain a challenge for the rest of the year. The pace of return to more foodservice and restaurant demand, along with increased export opportunities, will be the most significant factors in the recovery of livestock producers in the U.S. Internationally, livestock grew and performed in line with expectations across a diverse set of markets. We saw very positive results in places like China, where they're further along in their COVID-19 recovery, but we will be sensitive to see how Latin America and markets like Brazil perform in the remainder of the year due to COVID.</p>, <p>As we look ahead, we remain focused on advancing our five key priorities to ensure our long-term success, driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high-performing organization and championing a healthier, more sustainable future. We've continued to make important investments in products and innovations across the continuum of care from prediction and prevention to detection and treatment of disease, Supporting successful launches as well as new life cycle innovations and expansions of major products into new markets continue to be the cornerstones of our durable and steady performance. In the second quarter, we expanded major vaccine franchises with the approval of our Vanguard B Oral for dogs in Brazil and our Fostera Gold PCV MH and Fostera Gold PCVMetastim for vaccines for pigs in Australia.</p>, <p>We also continue to strengthen our diagnostic and digital capabilities, building on recent acquisitions in point-of-care and reference labs, along with additional investments. We plan to launch a new diagnostic platform for pet care in the third quarter called VetScan Imagyst. We are very excited about the potential for this disruptive innovation, which will be the first system to bring clinical pathology right to the point of care. This new multipurpose platform uses a combination of image recognition technology, algorithms and cloud-based artificial intelligence to deliver rapid testing results to the clinic. Its first indication will be for testing fecal samples for parasites, making it quick and easy to test and treat pets in the same visit.</p>, <p>We'll have more to say in the coming weeks as we prepare for a global launch. We also view diagnostics as playing an important role in the continuum of care for fish. In the second quarter, we acquired Fish Vet Group to add more diagnostic tools to our aquaculture portfolio, including environmental testing, which is critical to fish farming. Finally, at Zoetis, our key priority around high-performing teams is tied to creating a culture where all colleagues feel valued and included and is reflected in our commitment to promoting inclusion, diversity and equity across our organization.</p>, <p>Our leadership and Board are dedicated to being a force for positive change across the globe to drive greater equity and inclusion. And we have dedicated financial and people resources to do so. As part of this plan, we have made commitments to publish our diversity statistics and to increase our representation of black colleagues and people of color overall in the U.S. As the world leader in animal health, we are committed to demonstrating our leadership on this important business and social issue.</p>, <p>Now let me hand off to Glenn, who will speak more about our second quarter results and updated guidance for the full year. Glenn?</p>, <p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Thank you, Kristin, and good morning. I hope everyone is safe, healthy and adapting to what is certainly an unprecedented time for all of us. Today, I will provide additional commentary on our Q2 financial results, provide an update on our liquidity position and review our improved full year 2020 guidance. Beginning with the second quarter results. We generated revenue of $1.5 billion, which was flat on a reported basis and 4% growth operationally. Adjusted net income of $427 million decreased 2% on a reported basis and increased 4% operationally. Foreign exchange in the quarter had an unfavorable impact of 4% on revenue. This was driven primarily by the U.S. dollar strengthening against the Brazilian real, Australian dollar, Mexican peso and euro.</p>, <p>Operational revenue growth of 4% was driven by 2% price and 2% volume. Volume growth of 2% includes 3% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 5% in other in-line products. Companion animal products led the way in terms of species growth, growing 13% operationally, while livestock declined 5% operationally. Companion animal performance was driven by our parasiticide portfolio, which includes sales of Simparica Trio in the U.S., Canada and certain European markets and our key dermatology products, Apoquel and Cytopoint. Revenue from the acquisition of Platinum Performance and its nutritional products, acquired in the second half of 2019, drove the growth in equine. Livestock declines in the quarter were driven by challenges to our U.S. livestock portfolio.</p>, <p>Supply chain disruptions caused by reduced animal processing capacity and shifts in consumer demand from restaurant and foodservice to grocery stores affected our customers' purchasing decisions. This decline was partially offset by strong performance internationally with growth in swine, fish and poultry. New products contributed 3% to overall growth in the quarter, driven by Simparica Trio, ProHeart 12, Revolution Plus and our Alpha Flux parasiticide for salmon in Chile. We remain excited by the launch of Simparica Trio and are reaffirming the range of $100 million to $125 million for full year incremental revenue. While vet clinic penetration is occurring at a more moderate pace as a result of the COVID-19 pandemic, prescriptions in those clinics that have adopted</p>, <p>Trio have been more robust and cannibalization of Simparica has been less than we anticipated. Global sales of our key dermatology portfolio were $224 million in the quarter, growing 24% operationally and contributing 3% to overall revenue growth. Recent acquisitions contributed 1% growth this quarter, which includes Platinum Performance and our reference lab expansion strategy. Now let's discuss the revenue growth by segment for the quarter. U.S. revenue grew 6%, with companion animal products growing 19% and livestock products declining by 18%. Companion animal growth in the quarter was driven by sales of the Simparica franchise, our key dermatology products and the impact of recent acquisitions. U.S. key dermatology sales were $160 million for the quarter, growing 26%.</p>, <p>The continued strength of this portfolio was driven by expanded usage of both Cytopoint and Apoquel benefiting from our direct-to-consumer campaign, uptake in e-commerce channels and pet owners spending more time with their pets as a result of COVID-19. Simparica Trio performed well in the U.S. with sales of $36 million despite challenging market conditions in Q2. We are observing several positive trends, including rapid uptake in clinics that have adopted Trio, smaller-than-expected cannibalization of Simparica, sales coming from new patients to the category and taking share from current oral flea and tick competitors. Diagnostic sales increased 18% in the quarter, largely driven by our reference lab acquisitions. In addition, previous instrument placements created a solid foundation for consumables growth in the second quarter. U.S. livestock declined 18% in the quarter, driven by lower sales across all species.</p>, <p>In the second quarter, we faced challenges with significant declines in feedlot placements, reduced demand from the foodservice industry and the effects that had throughout the food supply chain and our customers, in addition to increased competition. To summarize, U.S. performance was strong in a difficult market environment. And the diversity of our portfolio, again, proved beneficial as growth in companion animal offset the challenges faced in the U.S. by our livestock portfolio. Our International segment had operational revenue growth of 3% in the second quarter, with more balanced performance across our companion animal and livestock portfolios. Companion animal operational revenue growth was 2% and livestock operational growth was 4%.</p>, <p>Increased sales in companion animal products was a result of growth in our key dermatology portfolio and our Simparica franchise, including the launch of Simparica Trio in Canada. While European markets were impacted significantly by COVID-19, the decline was offset by significant growth in other markets, including Japan and China. Diagnostics had a difficult quarter as wide-scale clinic closures resulting from COVID-19 limited the ability to place instruments and negatively impacted consumable usage. International livestock growth in the quarter was driven by swine, fish and poultry. Swine grew double digits in the quarter, primarily driven by China, which grew 25%, as key accounts continue to expand their herds and production shifts from smaller farms to larger-scale operations.</p>, <p>Our fish portfolio delivered another strong quarter. We saw favorable conditions in Chile and Norway that resulted in vaccinations being accelerated into Q2. In addition, we continue to see an uptake of the Alpha Flux parasiticide in Chile. Overall, our international segment was again a positive contributor to revenue growth, with performance in swine, companion animal, fish and poultry more than offsetting decline in cattle resulting from the COVID-19 pandemic. Now moving on to the rest of the P&L. Adjusted gross margin of 71.1% increased slightly on a reported basis compared to the prior year due to price, favorable manufacturing costs and product mix, which were partially offset by foreign exchange, recent acquisitions and higher inventory charges.</p>, <p>Adjusted operating expenses were flat operationally. The incremental advertising and promotion expenses related to Simparica Trio, recent acquisitions and R&D increases were largely offset by reductions to T&E and compensation-related costs as a result of COVID-19. The adjusted effective tax rate for the quarter was 22.3%. The increase versus prior year is driven by the jurisdictional mix of earnings and the impact of discrete tax benefits recorded in Q2 2019. Adjusted net income for the quarter grew 4% operationally, primarily driven by revenue growth, and adjusted diluted EPS grew 6% operationally. Next, I'd like to cover our liquidity position and our capital allocation priorities. We ended the second quarter with approximately $3.4 billion in cash and cash equivalents, including the proceeds from our $1.25 billion long-term debt issuance in May, of which $500 million is earmarked for repayment of our November 2020 maturity.</p>, <p>We have access to a $1 billion revolving credit facility and a coinciding commercial paper program, both of which remain undrawn. Given our strong cash flow and balance sheet, we remain committed to our capital allocation priorities for internal investment, M&A and returning excess cash to shareholders. Consistent with what I mentioned last quarter, we still anticipate elevated capital expenditures this year to support investments in manufacturing, information technology to support our recent acquisitions and capabilities in digital and data analytics. With regard to returning excess cash to shareholders, we remain committed to our 2020 dividend, which represents a 22% increase over 2019. In Q1, we repurchased $250 million in Zoetis shares before suspending the program in the second quarter in order to conserve cash. We have approximately $1.4 billion remaining under our multiyear share repurchase program.</p>, <p>Now moving on to our updated guidance assumptions for 2020. Our past performance has always given us confidence that the essential nature of our business, our diverse portfolio and the innovation we consistently bring to our customers would position us well during difficult market conditions. After assessing recent trends and our performance in the second quarter, we are further refining and raising our full year 2020 guidance. We expect recent positive companion animal trends in the U.S. will continue, although vet clinic revenue may moderate somewhat as pent-up demand works its way through the system. Alternatively, we believe social distancing measures are negatively impacting the foodservice recovery and will continue to present challenges to our livestock business in the U.S.</p>, <p>The more recent resurgence of COVID-19 cases in parts of the U.S., and expanding rates of infection in international markets continues to create uncertainty around the duration, scope and economic impact of the pandemic. Please note that our guidance reflects foreign exchange rates as of mid-July. And given our global footprint, movement in foreign exchange has had an impact on revenue and adjusted net income since we issued our prior guidance in May. Our current guidance includes favorable foreign exchange revenue of approximately $50 million and approximately $10 million at adjusted net income versus May guidance. For revenue, we are raising and narrowing our guidance range with projected revenue now between $6.3 billion and $6.475 billion and operational revenue growth of between 3% and 6% for the full year versus a negative 2% to positive 3% we had in our May guidance.</p>, <p>Adjusted net income is now expected to be in the range of between $1.685 billion and $1.765 billion, representing operational growth, a positive 1% to positive 5% compared to our prior guidance of negative 9% to negative 2%. Adjusted diluted EPS is now expected to be in the range of $3.52 to $3.68 and reported diluted EPS to be in the range of $3.14 to $3.32. In closing, while the COVID-19 pandemic has certainly presented a set of challenges we have not seen in the past, we are extremely proud of our colleagues and the commitments they have shown toward our customers, our company and animal healthcare. During this time, we have demonstrated the diversity and durability of our portfolio, the resiliency of our industry. And we have confidence in our ability to continue to execute on our strategy during these uncertain times.</p>, <p>Now I'll hand things over to the operator to open the line for your questions. Operator?</p>, <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-26874">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-26874');\n });\n </script>\n</div>\n</div>, <h2>Questions and Answers:</h2>, <p><strong>Operator</strong></p>, <p>[Operator Instructions] We'll take our first question from Jon Block with Stifel. Please go ahead.</p>, <p><strong>Jon Block</strong> -- <em>Stifel -- Analyst</em></p>, <p>Hey, thanks guys. Great. I guess I'll try to just load everything upfront. Glenn, I think op margins were at an all-time high in the midst of a global pandemic, so congrats. But some of that was likely eaten by mix. Yet, it seems like that mix may remain, as you mentioned, intact or favorable for the next couple of quarters. So as we think about margins into the back part of the year, is there anything to call out overall? And what about the cadence of 3Q versus 4Q?</p>, <p>Kristin, for you, just to shift over there, maybe if you can just talk to what you're seeing for a competitive response on Trio? And just a clarification, the new platform for diagnostics of the new offering, is that an entirely new VetScan analyzer that displaces the old one? Or is it a different unit specific for pathology? A lot there. But thanks for your time.</p>, <p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>Okay. So Jon, I'll just address the first part of your question with operating margins and mix. So as you say, we have very favorable gross margin in this quarter as well as the first half of the year. As we look into the second half of the year, we do expect there to be some deterioration in gross margin. And that does come from product mix, right? The separation that we've seen in performance in the quarter, livestock declined 5% operationally. Companion animal growth grew 13%. We expect that to narrow in the second half of the year, the differential in performance between companion animal and livestock.</p>, <p>So that will negatively impact mix. The other component is that we generally have a larger portion of livestock sales in the second half of the year than we do have in the first half of the year. The other component to consider is opex, right? As we move into the second half of the year and our field returns more and more to visiting clinics, T&E expenses, which has been very favorable, particularly in Q2, will rise as we go into Q3 and Q4. In terms of the dynamics between Q3 and Q4, don't really see any big differential in terms of the dynamics between Q3 and Q4.</p>, <p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p>, <p>Okay. Jon, with regards to your question on competitive response to Trio. It's been the response that we largely expected. Obviously, this is an innovative product. They were very aware it was coming. They're obviously running promotions. You probably saw some stock-ins as we probably saw as you move from Q1 to Q2, but we're really not seeing anything that we weren't expecting overall. And to address your other question with regards to Imagyst, it's a completely separate product. It is actually a scanner and a microscope that then uploads to the cloud for analysis. So it is completely separate than VetScan. And it's a platform. And the first product, as we mentioned, will be around fecal but it is not a replacement at all of the VetScan machine. It's a separate one that is both a scanner and a microscope.</p>, <p><strong>Operator</strong></p>, <p>And our next question comes from John Kreger with William Blair. Please go ahead.</p>, <p><strong>Jon Kaufman</strong> -- <em>William Blair -- Analyst</em></p>, <p>Hi, good morning. This is Jon Kaufman on for Kreger. I'd like to focus a little bit on livestock here. It'd be great to get a sense of your expectation for what the outlook looks like, not just in the coming quarter or two, but really into 2021 and over the medium term. So I guess a couple of questions within that. First, how much of a residual impact will the processing capacity issues have? And then second, on the lower foodservice demand, let's just say, hypothetically, the U.S. consumer really isn't ready to go out to restaurants until spring or summer of 2021, do you expect producers to exit and then you're serving a smaller end market? Or is it more of producers realize this is a period of limited profitability, but they don't adjust herd sizes and they stay in the market? Thank you.</p>, <p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p>, <p>Sure. Thanks, Jon. A few things on that. I think the two big trends you're seeing in U.S. livestock and I say you have to look at livestock. 60% of our livestock business is actually outside the U.S. And it grew at 4%. So again, this speaks to the diversity of our portfolio. But if you look at the sort of global trends you're talking about with regards to the movement from eating out to eating in, we do expect that to continue. And the guidance we've given for the rest of the year is that, that largely doesn't change too dramatically. It's obviously too early to tell in 2021 how that ultimately adjusts. The second factor to consider in the livestock overall is the packing plants, which have been an issue in the U.S. Packing plant capacity in the U.S. still looks to be about 95% to 97%.</p>, <p>And in some businesses, that may be good, but that does continue to back up animals. But again, this is mostly a U.S. trend, although we have seen a few isolated issues outside of the U.S. and Europe, Australia and some other markets. But again, I think what producers are doing are doing their best to actually alter where they can the flow of animals. This is much easier for poultry to do, given they only have to make decisions on 45 days. Pigs can do it over six months. So I think you will see a slight reduction in the U.S. in pork. It is much harder for cattle producers. Most of the animals are already here. So we do see cattle probably continuing to struggle probably through the first half of next year.</p>, <p>But I think the third factor besides the dine in, dine out and packing plants to consider is actually the export market. What has really helped maintain a lot of the U.S. livestock flows has been the export market, with the largest player there clearly being China. And given ASF, they are still in need of a tremendous amount of pork. So those are the three factors that we're considering that gives us confidence that, to your question, in the short to medium term, in general, livestock has grown around 5%. Obviously, it's been a little lower in the last few years. And I think, again, International was 4%. We were negative in the U.S. We do think in the medium term, it goes back to normal levels, but we do think livestock will continue to be challenged certainly this year and likely at least to the first half of next year. Thanks, Jon.</p>, <p><strong>Operator</strong></p>, <p>Our next question comes from Michael Ryskin with Bank of America.</p>, <p><strong>Michael Ryskin</strong> -- <em>Bank of America -- Analyst</em></p>, <p>Hi. And thanks for taking the question. Just two sort of quick ones for me. First, on the guide, for revenues and guidance of 3% to 6% core growth. I just want to make sure I'm not missing anything. You did 4% in the second quarter, you're over 5% year-to-date, or end of the range actually implies pretty meaningful deceleration from the second quarter, and yet most trends are pointing upwards. So I'm just wondering if you could go into that sort of what points you to 3%, what points you to 6%. When you guided in the first quarter you talked about a second wave in the fall and winter. Is something like that in your assumptions now? Or is there anything underlying going on there?</p>, <p>And then the second question, again, on the digital VetScan pathology instrument you talked about. Just a little bit of a follow-up. Is it an instrument-only product? Will there be consumables attached to it. And are you planning any different rollout in the U.S. versus International?</p>, <p><strong>Glenn David</strong> -- <em>Executive Vice President and Chief Financial Officer</em></p>, <p>So Mike, just in terms of your first question in terms of the guidance in revenue of the 3% to 6% growth. So to your point, in the first half, we grew 5% with a limited impact from COVID-19 in Q1. That would imply a second half of 2% to 7% growth essentially. I think, a, it's first important to understand that, in the first half, that 5% growth did have a contribution from acquisitions of about 1%, which we won't have that same contribution in the second half of the year because of when the timing of those acquisitions occurred last year. So that really brings you to organic growth of about 4% in the first half of the year, which is the real comparator for that implied 2% to 7% growth in the second half of the year.</p>, <p>So really pretty balanced between first half and second half organically, with the first quarter not really having a significant impact from COVID-19. To your question about what brings you to the low end of the range, that would be a more severe impact of COVID-19 than we're seeing today across our markets. What takes you to the higher end of that range is things sort of stabilizing as they are for the rest of the year without a more rapid or more significant impact of COVID-19.</p>, <p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p>, <p>Sure. And to take the second half of your question, Mike, on Imagyst, we will be launching the U.S. and a few markets outside of the U.S. as we move into the end of Q3 to Q4. And there are consumables, but the consumable the consumables, obviously, reagents there, but there's also a read. So obviously, with every test that's done, the read that's done in the cloud is also a fee. So there are both some products you use to prepare the specimen. But there's also more importantly, the read of each test in the cloud. So it's a consumable, I suppose, but it's almost like a different way of looking at it, which is a cost per read. I hope that answers it. Thanks, Mike.</p>, <p><strong>Operator</strong></p>, <p>Our next question comes from Chris Schott with JPMorgan. Please go ahead.</p>, <p><strong>Analyst</strong></p>, <p>[Technical Issues] for Chris. And the first one is on African Swine Fever. You've touched upon this in your prepared remarks, but talk about where we are in terms of the recovery in China. How much of the herd has been rebuilt? And would you expect this to represent a tailwind in the second half of the year?</p>, <p>And then another one on livestock. It seems a part of the dynamic that COVID is creating is producers switching to lower-cost alternatives. To what extent is this happening? And how sticky do you think this dynamic is as we think about recovery in 2021 and beyond? Thank you.</p>, <p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p>, <p>Sure. So we'll start with your question with regard to African Swine Fever in China. What we've been seeing in China overall is that the larger, more sophisticated integrated producers are starting to rebuild their herd. As you saw, very strong growth in our China business of 24%. What you're seeing underlying this is the beginning of the rebuild of these herds. This is more isolated to sophisticated producers who can ensure biosecurity. Because to be clear, there's still African Swine Fever present in China. So I think what you're seeing is some of the smaller backyard producers are not rebuilding there, but we are seeing some of the more sophisticated ones doing so. And that is a positive trend for us because they would be more likely to use our products overall.</p>, <p>But if you look at African Swine Fever, we are still predicting that China will have to continue to import pork, a significant amount for the next few years. So this rebuild is slow because, as I said, there is still African Swine Fever in China and a few isolated markets as well outside of China. So I suppose, if you look at that, for China, it will continue to be a tailwind for us, continuing to drive the China business as that herd rebuilds. And with regard to your second question on livestock and whether we're some people are switching to lower-cost alternatives. Historically, that has been the case. So people will trade down. What's slightly different is that this is a pandemic with a recession.</p>, <p>And I say that because, as long as there's more protein than people need, the price goes down. So hamburger meat right now is actually still pretty cheap. So historically, we would see in a recession, people trade down from beef to pork to chicken's egg. So we think that's still a longer-term trend. But with the disruption right now and the overcapacity, you are still seeing some other proteins still in certain markets on a relative basis not be that expensive. So I think it's I would say your overall hypothesis over the medium to long term is true, although in certain markets, given overcapacity, the difference in price is not as dramatic as it normally is.</p>, <p><strong>Operator</strong></p>, <p>And we'll take our next question comes from Louise Chen with Cantor. Please go ahead.</p>, <p><strong>Louise Chen</strong> -- <em>Cantor -- Analyst</em></p>, <p>Hi, thanks for taking my question. So I wanted to ask you how COVID-19 has changed the way you do business on both the livestock and companion animal side? What efficiencies have emerged? And what could be here to stay? Thank you.</p>, <p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p>, <p>Sure. Thanks, Louise. I mean I think similar to all businesses, we are we've had to adjust the way we operate, and I've been incredibly impressed as the resilience of our colleagues and our customers and their creativity. So the first trend is we've obviously moved a lot more to doing virtual seminars or webinars to handling orders and things like that by phone. Our customers have adopted to more telemedicine in certain markets around the world. And if you look at more broadly in the U.S. and in certain markets outside the U.S. to e-commerce. So that is, obviously, for us, it's supporting our producers, our veterinarians and pet owners to make sure they can access our products wherever they need.</p>, <p>But I think some of the skills that our field force is now learning will be one that will help us in the future, obviously reduce some of the travel that some of them had to do. But our field force across the world, where businesses are allowing, are actually back seeing customers. Now it's not as many customers as they saw before in a day, and that has to be both a customer and a colleague feeling comfortable in a given market. But it also has to flex, obviously, given some of the flare-ups in the U.S. geographically and across the world, a lot more flexibility there. So I think it's both our customers getting creative and flexible and our field force and some of our capabilities overall as a company to be able to meet our customers where they are. So I think I'm quite impressed at how our colleagues and our customers have adapted.</p>, <p><strong>Operator</strong></p>, <p>Our next question comes from David Westenberg from Guggenheim. Please go ahead.</p>, <p><strong>David Westenberg</strong> -- <em>Guggenheim -- Analyst</em></p>, <p>Hi, thanks for taking the questions and congrats on a great quarter. So for my first question, are you anticipating any kind of competitive launch in derm in the next year, say, 2021? I know we've heard about potential competitive launches for five probably five years now, but this time, it kind of feels a little bit different. And then for my second question was on the diagnostic platform. Is there any limitation to the sample type, say, blood, fecal, urine, even maybe physical tissue, etc.? And is there a component that might have a reagent to it? Thank you.</p>, <p><strong>KristIn Peck</strong> -- <em>Chief Executive Officer</em></p>, <p>Sure, sure. So I'll start, David, with your first question on the derm portfolio. We were obviously quite pleased with this performance in the quarter, growing 24%. This is now obviously a blockbuster product as well as category. And to your point, we have expected competition for a while given the attractiveness of the sector. At this point in time, we have very little intelligence, as you know, in our industry with regards to competitive launches. But based on what we know today, we are not expecting a competitive launch in the rest of 2020 and likely the first half of 2021. Obviously, that's always subject to change since we don't know exactly what our competitors are doing, but we continue to believe that we will have competition in the space. But we, at this point, do not believe it's in the next six to 12 months.</p>, <p>So our focus right now in our derm portfolio is building those brands as big as we can. And as you saw in the quarter, our focus on direct-to-consumer advertising in the U.S. to continue to grow our share and to build the market itself. So your second question with regards to the platform, the Imagyst platform, what we're saying is it's the first fecal will be the first. Obviously, it could look at lots of others. I mean that's still a product that is still in our research and development to look at other types such as, obviously, blood and other types. But those are not things we are prepared at this point to discuss. But obviously, the platform lends itself to be able to do multiple different tissue types. Thanks so much.</p>, <p><strong>Operator</strong></p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribers/info.aspx">Motley Fool Transcribers</a> has no position in any of the stocks mentioned. The Motley Fool owns shares of Zoetis. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-26060", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZTS"], "primary_tickers_companies": ["Zoetis Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zoetis Inc (ZTS) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 94, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-26060"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-26060", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-health-care", "tickers": "[\"\"]", "primary_tickers": ["ZTS"], "primary_tickers_companies": ["Zoetis Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zoetis Inc (ZTS) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 94, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ZTS earnings call for the period ending June 30, 2020. | It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.\n Good morning, everyone. And welcome to the Zoetis Second Quarter 2020 Earnings Call. I'm joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections.\n For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles, or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, August 6, 2020. We also cite operational results, which exclude the impact of foreign exchange.\n With that I will turn the call over to Kristin.\n Thank you, Steve. Good morning, everyone. I hope you and your loved ones remain safe and healthy as the COVID-19 pandemic continues to affect all of our professional and personal lives. On the call today, we will provide additional context around the impact of COVID-19 is having on our business, summarize the quarterly financial results, update you on our outlook and leave plenty of time to address your questions. In the second quarter, we delivered better-than-expected results given uncertainty around the COVID-19 pandemic. And I want to thank all of our Zoetis colleagues who have shown amazing resiliency, customer focus and perseverance throughout the year in a response to these challenging times.\n In terms of numbers, our revenue grew 4% operationally, with the U.S. segment up 6% and International up 3%. Our companion animal products continue to drive our business performance, with 13% operational growth, while livestock products declined 5%. Our adjusted net income increased 4% operationally in the second quarter. We have built a very strong companion animal portfolio over the last several years based on our internal innovation. And these products helped offset some of the deeper market challenges in the livestock market today. Our recently launched parasiticides, Simparica Trio, ProHeart 12 and Revolution Plus as well as our key dermatology portfolio of Apoquel and Cytopoint, provide a solid foundation that has continued to perform well this year.\n We continue to be very pleased with the performance of our new triple-combination parasiticide for dogs, Simparica Trio as well as the strength of the overall Simparica franchise. Glenn will share more details in his remarks. Our continued focus on meaningful innovation and the diversity of our portfolio across species, products and geographies remain core advantages for Zoetis during times of economic uncertainty. And we've also seen the essential nature of animal health playing an important role in the resiliency of our business and our industry at this time. In terms of COVID-19, our veterinary and producer customers are under increased pressure to deliver critical animal care and maintain a reliable global food supply, and we are fortunate to be able to support them in this mission.\n We continue to put the safety of our colleagues and customers first during this pandemic, and we've been very pleased with our team's ability to maintain productivity, even with safety and social distancing adjustments at our facilities as well as the ongoing use of remote work arrangements for the majority of our colleagues. Our field force has returned to meeting with customers in many geographies based on local guidance and practices. We monitor and adapt these plans on a daily basis based on local feedback and adjustments in markets that may be experiencing increased COVID-19 cases. Our teams are excited to be back out with our customers, but we're also preserving the lessons we have learned from effective online interactions, webinars and e-commerce to evolve our sales and support.\n In terms of supply chain, Zoetis has maintained a reliable inventory of critical medicines, vaccines and diagnostics to our customers and distributors in more than 100 markets around the world. And our research development programs remain on track in terms of filings, clinical trials and interactions with regulatory agencies. We remain confident in the progress of regulatory reviews of our monoclonal antibody candidates for pain in cats and dogs. Our submissions are proceeding as expected. This year continues to be uncharted territory due to COVID-19 and the related trends affecting our customers.\n However, the underlying demand for healthy pets and a reliable source of protein remains fundamental to the global economy. In the second quarter, we benefited from the veterinary clinics in the U.S. recovering much more quickly from the COVID-19 impact than we anticipated. Veterinary practices in the U.S. adapted quickly to curbside visits and mobile clinics to deliver critical care and maintain relationships with their customers. We also saw an acceleration of companion animal product sales through e-commerce channels as a result of the lockdowns in many states. Veterinarians and pet owners are adapting more quickly to these online options as a way to fill prescriptions for parasiticides and other medicines. We also know people are spending more time at home with their pets. They may be observing conditions such as itchiness or pain, which have previously gone unnoticed. And so we are actually seeing an increase in spend per visit in U.S. clinics.\n Meanwhile, outside the U.S., companion animal veterinary clinic performance has been in line with expectations despite wide market-by-market variations based on local dynamics. For Zoetis, we expect our overall revenue growth for the remainder of the year to be driven largely by companion animal products, especially our parasiticides and key dermatology portfolio. We plan to continue investing in direct-to-consumer advertising and digital marketing to support these products. Livestock is a very different picture and remains very challenged by the pandemic, especially in the U.S. Producers are adjusting to new market demands and distribution needs from foodservice and restaurant channels to more grocery and retail channels, while also managing ongoing labor, safety and trade issues.\n As expected, U.S. livestock in the second quarter saw a significant downturn as we expect that to remain a challenge for the rest of the year. The pace of return to more foodservice and restaurant demand, along with increased export opportunities, will be the most significant factors in the recovery of livestock producers in the U.S. Internationally, livestock grew and performed in line with expectations across a diverse set of markets. We saw very positive results in places like China, where they're further along in their COVID-19 recovery, but we will be sensitive to see how Latin America and markets like Brazil perform in the remainder of the year due to COVID.\n As we look ahead, we remain focused on advancing our five key priorities to ensure our long-term success, driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high-performing organization and championing a healthier, more sustainable future. We've continued to make important investments in products and innovations across the continuum of care from prediction and prevention to detection and treatment of disease, Supporting successful launches as well as new life cycle innovations and expansions of major products into new markets continue to be the cornerstones of our durable and steady performance. In the second quarter, we expanded major vaccine franchises with the approval of our Vanguard B Oral for dogs in Brazil and our Fostera Gold PCV MH and Fostera Gold PCVMetastim for vaccines for pigs in Australia.\n We also continue to strengthen our diagnostic and digital capabilities, building on recent acquisitions in point-of-care and reference labs, along with additional investments. We plan to launch a new diagnostic platform for pet care in the third quarter called VetScan Imagyst. We are very excited about the potential for this disruptive innovation, which will be the first system to bring clinical pathology right to the point of care. This new multipurpose platform uses a combination of image recognition technology, algorithms and cloud-based artificial intelligence to deliver rapid testing results to the clinic. Its first indication will be for testing fecal samples for parasites, making it quick and easy to test and treat pets in the same visit.\n We'll have more to say in the coming weeks as we prepare for a global launch. We also view diagnostics as playing an important role in the continuum of care for fish. In the second quarter, we acquired Fish Vet Group to add more diagnostic tools to our aquaculture portfolio, including environmental testing, which is critical to fish farming. Finally, at Zoetis, our key priority around high-performing teams is tied to creating a culture where all colleagues feel valued and included and is reflected in our commitment to promoting inclusion, diversity and equity across our organization.\n Our leadership and Board are dedicated to being a force for positive change across the globe to drive greater equity and inclusion. And we have dedicated financial and people resources to do so. As part of this plan, we have made commitments to publish our diversity statistics and to increase our representation of black colleagues and people of color overall in the U.S. As the world leader in animal health, we are committed to demonstrating our leadership on this important business and social issue.\n Now let me hand off to Glenn, who will speak more about our second quarter results and updated guidance for the full year. Glenn?\n Thank you, Kristin, and good morning. I hope everyone is safe, healthy and adapting to what is certainly an unprecedented time for all of us. Today, I will provide additional commentary on our Q2 financial results, provide an update on our liquidity position and review our improved full year 2020 guidance. Beginning with the second quarter results. We generated revenue of $1.5 billion, which was flat on a reported basis and 4% growth operationally. Adjusted net income of $427 million decreased 2% on a reported basis and increased 4% operationally. Foreign exchange in the quarter had an unfavorable impact of 4% on revenue. This was driven primarily by the U.S. dollar strengthening against the Brazilian real, Australian dollar, Mexican peso and euro.\n Operational revenue growth of 4% was driven by 2% price and 2% volume. Volume growth of 2% includes 3% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 5% in other in-line products. Companion animal products led the way in terms of species growth, growing 13% operationally, while livestock declined 5% operationally. Companion animal performance was driven by our parasiticide portfolio, which includes sales of Simparica Trio in the U.S., Canada and certain European markets and our key dermatology products, Apoquel and Cytopoint. Revenue from the acquisition of Platinum Performance and its nutritional products, acquired in the second half of 2019, drove the growth in equine. Livestock declines in the quarter were driven by challenges to our U.S. livestock portfolio.\n Trio have been more robust and cannibalization of Simparica has been less than we anticipated. Global sales of our key dermatology portfolio were $224 million in the quarter, growing 24% operationally and contributing 3% to overall revenue growth. Recent acquisitions contributed 1% growth this quarter, which includes Platinum Performance and our reference lab expansion strategy. Now let's discuss the revenue growth by segment for the quarter. U.S. revenue grew 6%, with companion animal products growing 19% and livestock products declining by 18%. Companion animal growth in the quarter was driven by sales of the Simparica franchise, our key dermatology products and the impact of recent acquisitions. U.S. key dermatology sales were $160 million for the quarter, growing 26%.\n The continued strength of this portfolio was driven by expanded usage of both Cytopoint and Apoquel benefiting from our direct-to-consumer campaign, uptake in e-commerce channels and pet owners spending more time with their pets as a result of COVID-19. Simparica Trio performed well in the U.S. with sales of $36 million despite challenging market conditions in Q2. We are observing several positive trends, including rapid uptake in clinics that have adopted Trio, smaller-than-expected cannibalization of Simparica, sales coming from new patients to the category and taking share from current oral flea and tick competitors. Diagnostic sales increased 18% in the quarter, largely driven by our reference lab acquisitions. In addition, previous instrument placements created a solid foundation for consumables growth in the second quarter. U.S. livestock declined 18% in the quarter, driven by lower sales across all species.\n In the second quarter, we faced challenges with significant declines in feedlot placements, reduced demand from the foodservice industry and the effects that had throughout the food supply chain and our customers, in addition to increased competition. To summarize, U.S. performance was strong in a difficult market environment. And the diversity of our portfolio, again, proved beneficial as growth in companion animal offset the challenges faced in the U.S. by our livestock portfolio. Our International segment had operational revenue growth of 3% in the second quarter, with more balanced performance across our companion animal and livestock portfolios. Companion animal operational revenue growth was 2% and livestock operational growth was 4%.\n Increased sales in companion animal products was a result of growth in our key dermatology portfolio and our Simparica franchise, including the launch of Simparica Trio in Canada. While European markets were impacted significantly by COVID-19, the decline was offset by significant growth in other markets, including Japan and China. Diagnostics had a difficult quarter as wide-scale clinic closures resulting from COVID-19 limited the ability to place instruments and negatively impacted consumable usage. International livestock growth in the quarter was driven by swine, fish and poultry. Swine grew double digits in the quarter, primarily driven by China, which grew 25%, as key accounts continue to expand their herds and production shifts from smaller farms to larger-scale operations.\n Our fish portfolio delivered another strong quarter. We saw favorable conditions in Chile and Norway that resulted in vaccinations being accelerated into Q2. In addition, we continue to see an uptake of the Alpha Flux parasiticide in Chile. Overall, our international segment was again a positive contributor to revenue growth, with performance in swine, companion animal, fish and poultry more than offsetting decline in cattle resulting from the COVID-19 pandemic. Now moving on to the rest of the P&L. Adjusted gross margin of 71.1% increased slightly on a reported basis compared to the prior year due to price, favorable manufacturing costs and product mix, which were partially offset by foreign exchange, recent acquisitions and higher inventory charges.\n Adjusted operating expenses were flat operationally. The incremental advertising and promotion expenses related to Simparica Trio, recent acquisitions and R&D increases were largely offset by reductions to T&E and compensation-related costs as a result of COVID-19. The adjusted effective tax rate for the quarter was 22.3%. The increase versus prior year is driven by the jurisdictional mix of earnings and the impact of discrete tax benefits recorded in Q2 2019. Adjusted net income for the quarter grew 4% operationally, primarily driven by revenue growth, and adjusted diluted EPS grew 6% operationally. Next, I'd like to cover our liquidity position and our capital allocation priorities. We ended the second quarter with approximately $3.4 billion in cash and cash equivalents, including the proceeds from our $1.25 billion long-term debt issuance in May, of which $500 million is earmarked for repayment of our November 2020 maturity.\n We have access to a $1 billion revolving credit facility and a coinciding commercial paper program, both of which remain undrawn. Given our strong cash flow and balance sheet, we remain committed to our capital allocation priorities for internal investment, M&A and returning excess cash to shareholders. Consistent with what I mentioned last quarter, we still anticipate elevated capital expenditures this year to support investments in manufacturing, information technology to support our recent acquisitions and capabilities in digital and data analytics. With regard to returning excess cash to shareholders, we remain committed to our 2020 dividend, which represents a 22% increase over 2019. In Q1, we repurchased $250 million in Zoetis shares before suspending the program in the second quarter in order to conserve cash. We have approximately $1.4 billion remaining under our multiyear share repurchase program.\n Now moving on to our updated guidance assumptions for 2020. Our past performance has always given us confidence that the essential nature of our business, our diverse portfolio and the innovation we consistently bring to our customers would position us well during difficult market conditions. After assessing recent trends and our performance in the second quarter, we are further refining and raising our full year 2020 guidance. We expect recent positive companion animal trends in the U.S. will continue, although vet clinic revenue may moderate somewhat as pent-up demand works its way through the system. Alternatively, we believe social distancing measures are negatively impacting the foodservice recovery and will continue to present challenges to our livestock business in the U.S.\n The more recent resurgence of COVID-19 cases in parts of the U.S., and expanding rates of infection in international markets continues to create uncertainty around the duration, scope and economic impact of the pandemic. Please note that our guidance reflects foreign exchange rates as of mid-July. And given our global footprint, movement in foreign exchange has had an impact on revenue and adjusted net income since we issued our prior guidance in May. Our current guidance includes favorable foreign exchange revenue of approximately $50 million and approximately $10 million at adjusted net income versus May guidance. For revenue, we are raising and narrowing our guidance range with projected revenue now between $6.3 billion and $6.475 billion and operational revenue growth of between 3% and 6% for the full year versus a negative 2% to positive 3% we had in our May guidance.\n Adjusted net income is now expected to be in the range of between $1.685 billion and $1.765 billion, representing operational growth, a positive 1% to positive 5% compared to our prior guidance of negative 9% to negative 2%. Adjusted diluted EPS is now expected to be in the range of $3.52 to $3.68 and reported diluted EPS to be in the range of $3.14 to $3.32. In closing, while the COVID-19 pandemic has certainly presented a set of challenges we have not seen in the past, we are extremely proud of our colleagues and the commitments they have shown toward our customers, our company and animal healthcare. During this time, we have demonstrated the diversity and durability of our portfolio, the resiliency of our industry. And we have confidence in our ability to continue to execute on our strategy during these uncertain times.\n Now I'll hand things over to the operator to open the line for your questions. Operator?\n | Zoetis Inc | (NYSE:ZTS) | Aug 6, 2020 | 8:30 a.m. ET | 8 | am | 2020-08-06 | 2020-08-06 | 2020-08-05 | 2020-08-07 | NYSE | In the second quarter, we delivered better-than-expected results given uncertainty around the COVID-19 pandemic. | In the second quarter, we delivered better-than-expected results given uncertainty around the COVID-19 pandemic. | [0.93990946 0.03007433 0.03001625] | positive | 0.909835 | 2020-08-07 | 158.460007 | 163.979996 | 158.000000 | 161.330002 | 2069138.0 | 161.949997 | 161.994995 | 157.410004 | 158.880005 | 1515700.0 | Pharmaceuticals | 2020-06-30 | 2020-06-30 | 0.89 | 0.648420 | 2020-06-30 | ZTS | 0.241580 | beat | 0.419998 | increase | 0 | positive |
| 602 | ZUMZ | /earnings/call-transcripts/2020/09/10/zumiez-zumz-q2-2020-earnings-call-transcript/ | [[[\n, <span class="article-content">\n<div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>\n<p><strong>Zumiez</strong> <span class="ticker" data-id="209251">(<a href="https://www.fool.com/quote/nasdaq/zumiez-inc/zumz/">NASDAQ:ZUMZ</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Sep 10, 2020</span>, <em id="time">5:00 p.m. ET</em></p><h2>Contents:</h2> <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul> <h2>Prepared Remarks:</h2> <br/> <p><strong>Operator</strong></p><p>Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. second-quarter fiscal 2020 earnings conference call. [Operator instructions] Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference call includes comments concerning Zumiez Inc.</p> <p>business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez filings with the SEC.</p> <p>At this time, I will turn the call over to Rick Brooks, chief executive officer. Please go ahead, sir.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>Hello, and thank you, everyone, for joining us on the call. With me today is Chris Work, our chief financial officer. I'll begin today's call with a few remarks about the second quarter. Then I'll share some thoughts on back-to-school and the rest of the year before handing call over to Chris, who will take you through the numbers.</p> <p>After that, we'll open up the call to your questions. Amidst the most difficult operating conditions the company has ever faced, we delivered better-than-anticipated results. To put some context around our recent performance, when the second quarter started in May, we had only 65 stores opened, which is just 9% of our entire store base. By the end of May, that number had increased to 492 stores or 68% of our store base.</p><p></p><div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zumiez Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZumiez%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=c72944dd-96d8-473b-9b21-b7ccb5cc4163">ten best stocks</a></strong> for investors to buy right now… and Zumiez Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZumiez%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=c72944dd-96d8-473b-9b21-b7ccb5cc4163" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div><p>By the end of June, we hit our peak with 691 stores or 96% of our store base open. Then in July, as a result of governmental orders, we closed a total of 69 stores in California and Australia and ended the second quarter with 645 stores or 90% open. For the quarter, our stores were open for 73% of potential operating days. Despite stores being opened 27% fewer days than a year ago, second-quarter 2020 revenue increased 9.6% as stores that were open, combined with digital activity, comped up 37.3%.</p> <p>Our top-line performance was highlighted by robust full-price selling across all geographies. As demand for our distinct and differentiated merchandise assortments and the continued efforts of our teams drove much stronger results than we had anticipated. By geography, we experienced stronger growth in our international markets with Canada, Europe, and Australia, all showing significant comparable sales gains and double-digit total sales growth despite closures in the period. As we discussed on our Q1 call in June, from the onset of the pandemic, we made some difficult near-term decisions around our expense structure in order to weather this crisis and emerge in a position of strength.</p> <p>This included laying off virtually all of our part-time staff, suspending all hiring, eliminating substantially all planned fiscal 2020 bonuses, and eliminating the majority of merit raises. Other operational changes we have made during Q1 and across Q2 include reducing store labor to reflect restricted operating hours, eliminating travel across all areas of the business, canceling national training and certain marketing events, and looking for the other costs that could be eliminated or delayed as a result of the current environment. These combined actions, coupled with the increased sales activity, allowed us to significantly leverage the business, contributing to second-quarter earnings per share of $1.01 and favorable cash generation, with close to $300 million in cash and marketable securities on our balance sheet and no debt, we believe we are well-positioned to navigate what is likely to be a volatile operating environment over the next few quarters while investing strategically in the business. These results in this environment underscore the strength of our brand and culture and speaks to the ability of our business model to adapt to change.</p> <p>We have discussed at length over the years the significance of our culture and brand and how they serve as critical competitive advantages that have helped us win throughout our 40-plus year history. The most significant component of our culture and brand has always been and will always be our people. The investment we made in supporting our full-time employees throughout the pandemic paid dividends in the second quarter as they were able to quickly and successfully execute the reopening of nearly our entire store base while continuing to service and engage with our customers physically and digitally. As it has in the past, I am confident that our unwavering commitment to our people will continue to further set Zumiez apart from the competition and meaningfully benefit our long-term performance.</p> <p>Looking ahead, there is still a great deal of uncertainty about the state of retail and the global economy due to the impacts from COVID-19. We are currently experiencing the effects the health crisis is having on back-to-school as many states and districts around the country have delayed the start of the new school year or decided to begin with virtual instruction. As a result, we did not see the sustained lift in demand we typically do starting in late July and running through early September. To date, the third quarter has been meaningfully impacted by the timing of back-to-school and the impact of virtual learning but has generally gotten stronger each week as we've moved through the quarter.</p> <p>At this point, we believe we are likely to see a more prolonged back-to-school season with some demand shifting out to later in the third quarter. However, we are currently planning the entire season to be meaningfully below the prior year. With regard to the upcoming holiday season, there are also a number of unknowns as is unclear what happens with the virus as we get into winter, how governments and individuals will respond, what impacts a pending election could have on our results, as well as the uncertainty around the financial condition of the consumer. What I do know is that Zumiez is well-positioned to pivot to meet the needs of our customers wherever, whenever, and however they want to engage with us, thanks to our dynamic teams and our one-channel mentality.</p> <p>Periods of significant change create opportunities. Companies that have the right people, strategies, and resources in place can take advantage of times like this to advance their brand and business. While Zumiez isn't fully immune to disruption created by the pandemic, we do believe the current environment will accelerate further consolidation globally and that our focus on the consumer will lead to further wallet and mind share gains as we emerge from the crisis. We must be smart in how we navigate the business challenges while also looking for long-term strategic investments that will set us up for the future.</p> <p>These include great real estate opportunities, new tools within our omnichannel formats, and other strategic investments to support the next era of intimacy and now with our customers. The strength in our financial position can be a significant advantage in these times. I have great confidence in our teams and their proven ability to navigate through unforeseen challenges. Our response to pandemic has highlighted the strength of our culture and brand and bolstered my optimism about emerging even stronger from this current crisis.</p> <p>With that, I'll turn the call to Chris to discuss the financials. </p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Thanks, Rick, and good afternoon, everyone. I'm going to start with a few high-level comments on the financial strength of the business, review our second quarter, and then provide an update on the quarter-to-date sales through Labor Day before discussing a few updates on the full year. We entered fiscal 2020 in a strong financial position with cash and marketable securities over $250 million and coming off the highest earnings per share in the history of our company. This resulted from years of commitment and hard work by our teams, coupled with strong financial planning.</p> <p>Now, for the closure and subsequent reopen, we have continued to see the strength of our one-channel model with our teams working diligently to serve the customer. The business ended the second quarter in a strong financial position. Cash and current marketable securities increased 58.6% to $299.1 million as of August 1, 2020, compared to $188.6 million as of August 3, 2019. The increase in cash and current marketable securities was driven by cash generated through operations, including deferment and reductions of $41.5 million composed of landlord payments, lower inventory levels, extended vendor terms, and deferred payroll tax payments.</p> <p>In addition to net income improvements related to abatements, credits, and expense reductions, this increase was partially offset by $13.4 million of share repurchases through the company's stock-buyback program prior to our stores closing due to COVID-19 and other planned capital expenditures. As of August 1, 2020, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the second quarter of 2020 with $126.7 million in inventory compared with $151.1 million of inventory last year, a decrease to $24.4 million or 16.1%. During the first quarter, our merchandising teams canceled or pushed out orders in Q1 to curb the impact of declining sales due to store closures, with demand in reopened stores exceeding our expectations in the second quarter, we increased our planned receipts meaningfully and still ended the quarter light on inventory across most categories with certain areas of our business significantly impacted by a delayed supply chain.</p> <p>Overall, the inventory on hand is well-positioned and selling at a favorable margin entering the third quarter. Turning to the income statement. Second-quarter net sales increased 9.6% to $250.4 million, compared to $228.4 million for the second quarter of 2019. The increase in sales was driven by a 37.3% increase in comparable sales which includes reopened stores and our digital activity, partially offset by store closures during the period.</p> <p>Breaking down the comparable sales further, we saw meaningful strength, both digitally and as our stores reopened, with comparable sales in stores over 20% and digital comparable sales for the quarter over 122%. As Rick mentioned, our stores were open for roughly 73% of potential operating days during the second quarter of 2020. And with the highest concentration of stores opened in June, we saw our strongest results in that month. From a regional perspective, North America net sales increased $16.5 million or 8% to $223.5 million.</p> <p>Other international net sales, which consist of Europe and Australia, increased $5.5 million or 25.4% to $26.9 million. Excluding the impact of foreign currency translation, North America net sales increased 8.2% and other international net sales increased 25.8% for the quarter. From a category perspective, all categories were up in total sales with the exception of footwear with hardgoods being our most positive, followed by men's clothing, women's clothing, and accessories. Second-quarter gross profit was $90.9 million, compared to $77.2 million in the second quarter last year, and gross margin was 36.3% compared to 33.8% a year ago.</p> <p>The 250-basis-point increase in gross margin was primarily driven by a 170-basis-point increase in product margin, 160-basis-point decrease in store occupancy costs, a 50-basis-point decrease in distribution costs, and 20-basis-point decrease in inventory shrinkage. This was partially offset by a 160-basis-point increase in web shipping costs due to increased web activity as a result of COVID-19 related to store closures. However, shipping costs leveraged to the prior year were compared to total web sales. SG&A expense was $57.7 million in the second quarter, compared to $65.5 million a year ago.</p> <p>A decrease of $7.8 million or 11.9%. SG&A expense as a percent of net sales decreased 560 basis points for the quarter to 23.1% of total sales. The decrease was primarily driven by a 240-basis-point decrease in our store wages, a 100-basis-point leverage in other store costs, a 70-basis-point decrease due to governmental payroll credits, a 70-basis-point decrease in corporate costs, a 40-basis-point decrease in corporate wages, a 30-basis-point decrease in the accrual of annual incentive compensation, and a 20-basis-point decrease in national training and recognition events. Operating income in the second quarter of 2020 was $33.1 million or 13.2% of net sales, compared with operating income in the prior year of $11.7 million or 5.1% of net sales.</p> <p>During the quarter, we recognized flow through on incremental sales of almost 100% based on the factors outlined above and our ability to adjust quickly in this challenging time. Net income for the second quarter was $25.4 million or $1.01 per share, compared to net income of $9 million or $0.36 per share for the second quarter of 2019. Our effective tax rate for the second quarter of 2020 was 26% compared with 30.7% in the year-ago period. Now, to our fiscal third quarter-to-date sales results.</p> <p>We are providing quarter-to-date sales through Labor Day, Monday, September 7, as this time period is more comparable to the prior year given the shift in the Labor Day holiday. Total third quarter-to-date sales for the 37 days ending September 7, 2020, were down approximately 14% compared with the same 37-day time period in the prior year ended September 9, 2019. For this same time period, our stores were open for 91% of the potential operating days due to ongoing mandated store closures, primarily in California, Hawaii, and Australia. Total comparable sales for the 37-day period ended September 7, 2020, were down 5.1%.</p> <p>By channel, our open store comparable sales decreased 10.7%, and our e-commerce sales increased 27.4%. The quarter-to-date comparable sales decrease discussed above was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased due to an increase in units per transaction offset by a decline in average unit retail. Quarter to date, total sales increased in our hardgoods category.</p> <p>All other categories were down in total sales quarter to date with footwear being the most negative followed by men's, women's, and accessories. Our overall quarter-to-date performance reflect the delayed start to back-to-school with many states and districts pushing back their start date. The impact to schools going back virtually and continued store closures. Looking at the weekly cadence of our results in August, they generally improved each week and we continue to believe that there may be opportunity for a prolonged back-to-school season into September and October.</p> <p>Due to limited visibility to the business, we will not be providing guidance for the third quarter of 2020 or the fiscal year. That said, we do want to give a few thoughts on how we're looking at 2020. We are expecting sales for the third quarter to be down to the prior year. However, we believe our results will be better than the previously disclosed third quarter-to-date sales decline of approximately 14%.</p> <p>We experienced a product margin increase of 170 basis points in the second quarter and a positive start to the third quarter. We are managing inventory tightly and working with our brand partners to navigate this environment. In the third quarter, we expect to see a benefit in product margin to the prior year but do not anticipate that it will be as significant as the year-over-year growth experienced in our second quarter. We continue to manage costs across the business, understanding this challenging environment, and limited visibility.</p> <p>Through the first six months, we have seen significant reductions in certain expenses as we work to align the cost structure to the sales loss during our closure and potential for greater economic losses as we move through the year. We are currently planning SG&A expenses across the business to be down 12.5% compared with 2019 associated with reductions in store operating hours, travel and training, planned capital, incentive compensation, and many other benefits. With the potential variability in performance over the back half of the year, this estimate could increase or decrease as we gain more visibility to the sales trends, our ability to adjust expenses, and the potential for noncash impairments. We now expect to open approximately 10 new stores in 2020, including two stores in North America, seven stores in Europe, and one store in Australia.</p> <p>This is down from our plan coming into the year of 20 new stores. We expect capital expenditures for the full 2020 fiscal year to be approximately $11 million, compared to $19 million in 2019 and our original plan for 2020 of between $18 million and $20 million. The majority of our capital spend will be dedicated to new store openings and planned remodels. We expect the depreciation and amortization, excluding non-cash lease expense, will be approximately $24 million, down slightly from the prior year.</p> <p>And we are currently projecting our share count for the full year to be approximately 25.3 million shares. At this point, we are not expecting any further share repurchases until we have better visibility into the business. With that, operator, we'd like to open the call up for your questions.</p> <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-84106">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-84106');\n });\n </script>\n</div>\n</div><h2>Questions & Answers:</h2><br/> <p><strong>Operator</strong></p><p>[Operator instructions] Our first question comes from Sharon Zackfia with William Blair. Your line is now open.</p><p><strong>Sharon Zackfia</strong> -- <em>William Blair -- Analyst</em></p> <p>Hey, good afternoon. Congratulations. I guess a question on the inventory position. I think it was, Chris, that you said you thought you were in a good position, but it looks pretty down even relative to the sales you indicated for back-to-school.</p> <p>So I mean, are there pockets of scarcity in your inventory at this point? And how well positioned are you to chase sales if it's a prolonged back-to-school? And then just curious on your thoughts on store development beyond 2020, considering you're rebounding and doing much, much better than most others in this environment.</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Sure, Sharon. Happy to start with the inventory, and then we'll tackle the store question. From an inventory perspective, as I mentioned in the prepared remarks, it's been obviously a roller coaster of a year. As the first quarter hit us and the store closures, our buying teams worked very diligently to work with our vendors to push out products, canceling over $100 million of purchase orders.</p> <p>And then once we opened in the latter part of April and into May, we started to really see elevated results from where our expectations were. And that put them in the opposite situation of really chasing. And then I think you couple that with where we have been from getting the supply chain up and running created quite a few challenges as we move through the period. So a really great testament to our buying teams of reacting and bringing product in and our distribution and operations teams and moving it through the channel.</p> <p>And ultimately, our store teams in executing on how they did with our customers, both physically in-store and digitally, but it was not without challenges. And so I think as we look at inventory and we look at how we ended the quarter, we would definitely say we were lighter than we wanted to be. I would tell you inventory is very clean. So when I say we execute inventory in a good position, we feel very good about the makeup of our inventory, but we certainly would have liked to have had more of it specifically in categories like hardgoods and footwear, which were probably two of our more challenging areas.</p> <p>I think this also gets into kind of the supply chain and how we're working through that. And I know there's been a lot of retailers who have talked about the varying degrees of challenges in the first six months of the year. And well, as we look at this, the challenges sort of started, which is getting back up and running after the closure period and then kind of move to getting all the products we want, getting it at the timing of our deliveries and then the increased demands on the overall ecosystem, including getting things from our distribution center to our stores, as well as our stores to customers just based on the elevated volume levels. And then I think as we look forward, we also are thinking about the potential for some peak surcharges that are out there and what other operating challenges we might have.</p> <p>So as you can imagine, we continue to try to plan for this, and we believe that our one-channel philosophy actually puts us in a pretty good position in how to work through this because we're shipping generally much closer to the customer. We have a distributed network of stores doing the shipping, which has been pretty helpful. And we're continuing to work with our shipping partners, as well as execute our own mitigation techniques to the risks that are in front of us. So I think, overall, as we continue to manage through this as we've moved through August, we started to see the inventories rightsized a little bit more.</p> <p>Again, we continue to feel good about our inventories. But as you pointed out, there were some probably opportunities that we had and some potential sales misses where we just weren't able to get inventory in to satisfy the consumers' demand.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>And, Sharon, the second part of your question relative to our store footprint and thinking about store development beyond 2020, I think to really address that question, I want to break it into two parts. And so let's talk about the U.S. market, and then we'll talk about our international markets. So I think it will help us understand a little bit about the differences between both markets and the challenges and opportunities in each market.</p> <p>So in the U.S., you know that we -- I think it's pretty clear to most people today that we probably have too many retailers in the market, too much retail space, and we also probably have too many malls. So as you know, we obviously believe for a long time that's really been -- this is being driven by the empowered consumer and the power that they now have through complete transparency of inventory availability, the digital-first strategy, right, that consumers have in searching and finding product. So we expect to see that this consumer-driven cycle is going to be what really drives the consolidation of retailers. Most retailers simply don't need as many locations.</p> <p>And it's also with struggling. It's what's causing malls to struggle and threatening some mall survival. Now, we also think that the pandemic has really accelerated both of these cycles. I think there's plenty of evidence looking at the current marketplace that that's probably true.</p> <p>But we believe in the long run that the rationalization around retail and malls is going to be good for us and what will drive -- really help us drive share consolidation for us as we're positioned, I really believe, to win our segment of this consumer world. So I'll ask Chris to share a few more thoughts around the U.S. market, and then I'll talk about the international market.</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Sure. I think what I'll try to do is just kind of talk about the strategy of real estate and how we think about store units. And we've said for quite some time, we really don't want to have one more unit than we need to in any given geographic area. And so we're definitely moving toward the trade area concept, looking at stores and web to serve our customer and believe that they definitely work together.</p> <p>And so from a strategy perspective, I mean, there's definitely a short-term here in regards to where we stand with COVID and working with our landlord partners. And I can tell you we've worked really closely to manage through what's a difficult time for both of us. And as we mentioned on our Q1 call, we did hold back on significant portions of our April, our May rent, and, even in some cases, our June rent. As we work through this process, we're not going to give a lot of detailed color on where we stand with each landlord and the amount of abatements or deferrals other than some of the high-level commentary we gave as part of our prepared remarks around how much deferral is on -- of all of our deferrals, leases, the inventory balance, the payroll, and our AP, as well as we gave some color around occupancy and how taking our P&L from a leverage perspective.</p> <p>But what I can say is we've worked very hard with our landlord partners to find compromises that I think are working for both sides. And we have quite a few of the process done and behind us, but we also have quite a few agreements that we've got to get documented and still complete in front of us. So we continue to work through it. And longer term, our strategy is to really manage risk when it comes to the number of stores and, as Rick talked about, in the U.S., most likely being over-malled.</p> <p>And so we look at it with the bottom 10%, 20% of our stores. Obviously, trying to keep them on very short deals to allow us flexibility in how we navigate in those markets. Definitely looking at each unit or each store is what its role in the trade area is and how we think about stores, both in terms of their four-wall sales, as well as the fulfilling and trying to align it to optimize our store count within each trade area and doing this over a multiyear view to really kind of say, OK, how profitable can we be? And coupling that with data that we're learning constantly from our STASH data and then just kind of looking at how does this all play together to serve the customer, knowing that certain centers, high-volume centers are still going to have long-term demand and other maybe lower volume centers have peak seasonal needs, but can also support the high-volume centers from a fulfillment perspective over the long term. So as we look at that bottom 20%, we've talked about this over the years.</p> <p>We have roughly 75% we can get out of in the next three years, over 80% in the next five years. And that gives us this kind of comfort level around how we can maneuver in this cycle. So that's kind of strategy component. I'll kick it back to Rick just to talk about the international side.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>Great. Thanks, Chris. And just summarizing all that, Sharon, relative to U.S., as it relates to, again, your question around store development, we really see the U.S. more as reflecting of how a market is going to be rationalized, both in terms of the number of malls that will be in the marketplace, as well as retailer store footprint.</p> <p>And then how we're going to optimize our business to capture share in the U.S. marketplace and to grow earnings through the concept of trade area, trade area execution. Now, the international marketplace, I think it's a bit different. On the international real estate side, there's no doubt that the empowered consumer is -- that is a universal trend today driven by smart technology.</p> <p>That's still driving on global marketplaces in our international marketplaces. That's still driving retailer consolidation. Now, on the mall side, they're generally pretty rationalized in terms of the mall world in our international marketplaces today. So we don't expect to look at the mall world outside of the U.S.</p> <p>and say there needs to be a great amount of rationalization. In fact, I think, to a certain extent, we believe that the malls international markets reflect and represent the future how maybe U.S. malls are going to look, right, relative to not only rationalizing the square footage but relative to what the different kinds of tenant mix might look like in U.S. malls as they go through the rationalization process.</p> <p>For us, though, because we are seeing consolidation of retailers in international markets. We think that creates an opportunity for us that there is going to be space opportunities created in good quality centers. So for us, Sharon, we think this is a growth opportunity for us in our international markets. For future expansion because they're just going to be those opportunities.</p> <p>We think there could be some really high-quality, low-cost potential opportunities for us to grow our presence in these markets. And of course, growing our presence isn't just about the physical world. It's about the concept of how we execute omni to serve customers in these marketplaces. So that's where it gets to the right scale in each market to tip over, so we can execute the omni platform, which gives a whole additional boost to operating performance, both on the sales line and on the profit line, as we do this.</p> <p>So I really think we have a big opportunity for profitable growth in our international markets over the next few years, Sharon. And of course, we will, as always, make sure we manage that growth with our culture and brand positioning right at the forefront of our thinking. But we're certainly well-positioned, I think, better position than any of our competitors to execute on those opportunities over the next few years.</p><p><strong>Sharon Zackfia</strong> -- <em>William Blair -- Analyst</em></p> <p>Thank you so much.</p><p><strong>Operator</strong></p><p>Our next question comes from Janine Stichter with Jefferies. Your line is now open.</p><p><strong>Janine Stichter</strong> -- <em>Jefferies -- Analyst</em></p> <p>Well, thanks for taking my question. I want to dig a little bit more into back-to-school. It sounds like you expect the sales trend to pick up in 3Q a bit from where it is currently. Maybe you can provide some regional color on what you've seen in regions or districts that have already gone back to school, those that have gone back in-person.</p> <p>That would be a helpful color. Thank you.</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Sure. Yeah. I'm happy to provide some color. And I think this is where really understanding back-to-school has become increasingly challenging this year, obviously, just with the delayed Labor Day, delayed back-to-school, the impact of digital versus in-person schooling and just trying to understand where the health of our consumer is from -- or the financial health of our consumer, I should say.</p> <p>So we did prepare some thoughts on this and kind of what we're seeing. And what I'll try to do is lay that out. I will disclose most of this is just domestic, as this is really where the bigger part of our business is and back-to-school. So as we look through that, I would tell you, like we said in our prepared remarks, our results have generally gotten better each week with last week or the fifth week of the period being positive overall.</p> <p>By channel, we talked about comparable sales and where they're at in our prepared remarks. And while we see all categories down, skate hardgoods has still been up, which is a good thing. We did see some softness on the Labor Day weekend as compared to last year. But again, this is incredibly challenged to analyze because of the move-out.</p> <p>So let me kind of try to phrase up from what we're seeing from the type of go back. So we've done some survey work across all of our stores. And based on that survey work, what we're seeing is about 50% of our schools are going back with some sort of hybrid, about 40% of our schools are going back 100% remote, and about 8% of our schools are going back in person with just a couple of percent that didn't come back. So as we look at this, and then we start to apply sales to it because almost all of our regions and stores have gone back at this point.</p> <p>What we're seeing generally is that where we've gone back in person, those regions are performing the strongest with kind of a positive low single-digit comp. Where we've gone back in hybrid with some in-person and some remote learning, we're seeing kind of a down low single digit. And where we are going back purely just remote has been down over 10%, so we're definitely seeing the bigger challenges there. The other piece for us is just the belief that this will continue on to September and August and -- I'm sorry, in September and October as we continue to expect to see some demand here into the next couple of months, and I think what it means to the future is we just have to continue to be super nimble.</p> <p>There's definitely a potential upside and downside, given a variety of scenarios that could play out here. And we look at those as our consumers' ability to spend going forward. Can we see this prolonged back-to-school that we and others are expecting? Or could there be a future back-to-school day? If we are able to manage through the pandemic and more and more districts and states decide they want schools to go back in-person will we see another back-to-school date potentially later in the fourth quarter or even in January of next year? What happens if more stimulus has gone into the economy? Where do unemployment levels go? How do we think about metering at peak if we're not able to increase the capacity in our stores? How does safety measures for our employees and our customers play into this? And what happens if we start to see more and more resurgence around the country? And I, quite frankly, could probably go on. We have other things that we thought about as well.</p> <p>So I think we just have a lot to learn. We're going to remain really cautious. And as I said, nimble, it's kind of a keyword we're using. I think it's really helped us in the first six months of the year and really how we have to look at the back six months.</p> <p>And our teams are good at it. I think that's the piece that we're on top of, and we feel like regardless of how this plays out into Q3 and Q4 that our teams are good, and we can be on the top side of the retail marketplace for the back half of the year.</p><p><strong>Janine Stichter</strong> -- <em>Jefferies -- Analyst</em></p> <p>Great. That's incredibly helpful detail. And then just a follow-up on footwear. Can you elaborate a little bit more on the weakness? Is that just the inventory challenges you referenced or is it more of a back-to-school business typically, or is there some change in trends? Any color there would be helpful.</p> <p>Thank you.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>Yeah. Janine, I'll start and let Chris add any comments he might have. I mean, some of this is going to be trend-related. Remember, we are on a multiyear run on footwear.</p> <p>Prior to this a couple of years ago, we had a long buildup in our footwear cycle. And some of this is clearly a result of the pandemic and the supply chain discussions that Chris talked about. So I'm not -- it's always -- is usually the case. There's multiple factors, I think, that drive where we're at now.</p> <p>Footwear been more difficult other than some categories prior to the pandemic. But we clearly have seen the supply chain impacts of, again, I think it's just how difficult the footwear industry is to manage because of this. Everyone has to take more risk in footwear because of the sizing that takes place in the footwear market. But for us, I guess, the key thing in my mind is -- I'll remind you what I always say about where we're at and how our business model works.</p> <p>Despite the challenges in footwear we managed of what I think are pretty remarkably good results. And as Chris said, no matter how third or fourth quarter turn out this year, the one thing I'm totally confident on is that I think we're going to outperform all of our competitors on a relative basis and most especially retail for that matter. So the reason that is because our business is small, so dynamic with the number of brands we carry, of emerging brands we're carrying that become growth brands in our world, the number of departments and categories that we expose to our consumers, the lifestyles we represent across the marketplace. So one thing I'm confident on no matter what the challenges are with footwear, I just want to remind everyone that our business is about managing the diversity of what we offer to deliver to our really self-expressive consumer.</p> <p>And our goal is always no matter what the transact is, whether it's a booming skate market, a tough footwear market, we always realize that we have categories and departments that are increasing, others that are decreasing. We have brands that are growing, brands that are shrinking. The whole goal in our business is to build a diverse portfolio of departments, categories, lifestyles, and brands that yield a positive comp across cycles. So that's kind of the headlines there.</p> <p>Some of it in footwear-specific, Janine, is related probably to growth trend, as well as more importantly, in 2020, it is definitely related to supply chain and the challenge of the footwear industry in terms of the site density, I think, that's out there and the risk that we all have to take in inventory. But beyond that, I'd just remind everyone about what our model is about. We're built to withstand down-trending departments like that and capture share in other ways through other brands and through other departments to run gains. That's what we try to do.</p><p><strong>Janine Stichter</strong> -- <em>Jefferies -- Analyst</em></p> <p>Thank you very much.</p><p><strong>Operator</strong></p><p>Our next question comes from Jeff Van Sinderen with B. Riley. Your line is now open.</p><p><strong>Jeff Van Sinderen</strong> -- <em>B. Riley FBR -- Analyst</em></p> <p>Hello, everyone. Terrific work in Q2. Can you speak more about what you're seeing in the California market with closures? Did you see business there shift to digital? And then what have you seen in markets in California that have reopened?</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. Sure, Jeff. Well, as we pointed out in our prepared remarks, right, we reopened the vast majority of our California stores in the second quarter only to close them again in the beginning of second week of July and ended July with those stores closed and then on into August as well. What we can tell you is that California was a big piece of our drop in sales, both in July and August, and really back-to-school to date and the numbers that we talked about.</p> <p>It was one of the key drivers, representing probably about a third of our decline overall on a consolidated level. So we definitely saw some pain there, even once we allocated the web sales there. Now, we did see web sales go up and have pretty much seen that everywhere where we have closed, just like we did when we did the math closures in Q1 where in stores closed, we start to see spikes in those regions in volume. And then more recently, we've opened a fair amount of those California stores with the exception of LA County and a few others.</p> <p>So we have seen a good rebound there as expected with the reopening. So we'll see how that plays out as we move through Q3, but it was definitely a big impact on our -- the end of Q2 and our back-to-school to date.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>And I'd just add to Chris's comments, Jeff, that, of course, I'm sure you're aware, most of California is going to be a virtual back-to-school. So again, as we think about the impact of California, we're thinking that how schools go back is going to be reflective of how we capture whatever back-to-school turns out to be. So if it lengthens out and is prolonged, we think those are probably more likely the markets where we'll see that back-to-school stretched out. That's right.</p><p><strong>Jeff Van Sinderen</strong> -- <em>B. Riley FBR -- Analyst</em></p> <p>OK. And could you touch on the rent withheld question, how you're thinking about that, and maybe speak more about what level or magnitude of rent reductions we should think about as renewals come up given kind of the tough spot that landlords are in?</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Sure. Well, let me talk about just the cash position overall and what we tried to lay out in this call, I mean, we are incredibly happy with where we're at from a financial strength position. Obviously, we entered the year in a good spot with really good planning and hard work to get there. And our teams have just managed incredibly well here through the first six months of the year to get us to where we are, which is at $299 million in cash with no debt.</p> <p>That being said, we did want to disclose that we have just over $40 million in deferments and other costs that are there on the balance sheet that we think are real. So as we think about the cash balance, we try to rationalize it, it's probably somewhat something closer to $260 million in a more rationalized environment. And that's made up of not just deferrals, but the inventory position, which, as we mentioned, we are lighter on inventory than we'd like to. We would maybe not buy all of that inventory back, but we certainly would like to get a good portion of it, AP deferrals that we laid out, as well as some payroll deferrals that we're taking advantage of.</p> <p>So as we plan to move through the year, we do expect a lot of that to have been paid out. In regards to the rent situation, we're not going to get into a lot of detail other than to say that we are working with our landlords really closely. And this is a tough situation for them and for us. And we're trying to work with this in the best scenario for both of us.</p> <p>And so in some cases, that has led to deferment. In some cases, there's abatement. And in some cases, these will be things that we continue to work with as we evaluate centers into the future. And I don't think that's different than what we've seen over the last five to 10 years in the portfolio.</p> <p>Some malls are definitely winners in marketplaces and some malls are more challenged. And we have to work together to optimize them and get them to the right cost structure to make them work. So I think we'll keep seeing that play out in this market. And I think over the long term, this is an area that we think we can benefit from our ability to maximize our store real estate with our one-channel philosophy.</p><p><strong>Jeff Van Sinderen</strong> -- <em>B. Riley FBR -- Analyst</em></p> <p>OK. Thanks and best of luck.</p><p><strong>Operator</strong></p><p>Our next question comes from Mitch Kummetz with Pivotal Research. Your line is now open.</p><p><strong>Mitch Kummetz</strong> -- <em>Pivotal Research Group -- Analyst</em></p> <p>Yes. Thanks for taking my questions. I guess I got a few of them, so I think we'll go through these pretty quickly. So Chris, on 3Q to date, I know you guys are down 14%.</p> <p>Can you say what percent of 3Q is normally in the books after 37 days of the quarter? Is it like 55%, 60% given the importance of back-to-school?</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. Given the delay of where we are now, it's in that range. It's closer to that 60% that we are through the Labor Day weekend that we reported.</p><p><strong>Mitch Kummetz</strong> -- <em>Pivotal Research Group -- Analyst</em></p> <p>Got it. And then on gross margin, I think in your prepared remarks, you mentioned that product margins should be up year over year, maybe not as strong as it was in 2Q. But could you maybe speak more broadly about gross margin? Do you expect that to be up or down? I would imagine that if the sales are down in 3Q, that could put some pressure on occupancy. And if digital continues to outperform, maybe that puts a little pressure on shipping.</p> <p>So could you kind of maybe work through those components?</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. Absolutely. And I think this is really interesting how this has worked out because, obviously, with a 9% sales gain in the second quarter, we saw a pretty strong gross margin benefit, up 250 basis points. You're right.</p> <p>We talked about product margin being 170 basis points, which was a benefit. We also, at that level, see pretty good leverage across occupancy and some of our distribution costs. We also saw some benefits on shrinkage. And then we talked about web shipping being an offset to that, up 160 basis points, although it leveraged as a percent of digital sales, which is an important callout because while we are seeing some elevation in gross margin because of the mix to web, on the flip side, it's leveraging across digital sales, which is important with how we measure the business.</p> <p>So I think as we move into Q3, we are expecting product margins to be up, albeit although not what we saw in Q2, as you indicated. How we see gross margin is going to be more tied to the mix of the business and where sales overall go. And I think that's where -- to your part of your question or what you commented and what your question is if sales are down, that will provide some challenge on the gross margin side. We do expect web to have a higher penetration of total sales in the third quarter.</p> <p>We have seen that through the back-to-school period we reported, and so that will also put some pressure on gross margin. But at the end of the day, if we can continue to leverage that expense, we do think it could still be a benefit to our overall bottom line. So we're trying to really manage through this. It's pretty variable, as you pointed out, to the sales number.</p> <p>But if we can grow sales, we definitely think we still have opportunity to grow gross margin.</p><p><strong>Mitch Kummetz</strong> -- <em>Pivotal Research Group -- Analyst</em></p> <p>Got it. And then lastly on hardgoods. I know that was your strongest-performing category in the quarter. That's been the case for a few quarters now, at least.</p> <p>Is there any way you can say how strong? I mean, was the growth year-over-year growth there a multiple of the next best category? I mean, there's been a lot of chatter about sort of equipment in general, whether it's bikes or you name it being particularly strong this summer. So I guess maybe a two-parter. Just maybe can you speak a little bit more to the growth of hardgoods? And then secondly, sort of how do you think that business into the back half as weather changes the skate typically fall off? Or do you kind of see this maybe morphing into maybe a strong snow hardgoods business? Just give a little more color on that.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>I mean, let me start, Mitch, and then I'll ask Chris to follow up with some other one -- maybe some more details to your question, but we tend to look at these department-driven cycles as it tend to be multiyear cycles. So we had a multiyear cycle around footwear starting four, five years ago that ran for a few years. So we're currently in year 2 of the skate hardgoods cycle. And now, the question would be do you think that the impact of the pandemic is accelerated in the cycle, which is, I think, kind of embedded in your question there relative to what we've seen in other outdoor activities, right, that are taking place.</p> <p>And I'm not sure that we actually know the answer to that question. I think we think there are really multiple drivers to what's going on in the skate cycle today. And it first starts with the fact that we had four or five years of down trending in skate hardgoods. So we're kind of levelizing out would be what the first thing I'd tell you relative to consumer demand.</p> <p>The second thing we see and we believe is true is that there are a significant number of women, more women buying skate hardgoods and skate products than ever before. And that's clearly what we hear from all of our teams across the country that has clearly been a difference in this cycle, that there are just more women out there, which is a pretty awesome thing to see. And we also believe that part of what we're experiencing now, and the uptrend of the skate lifestyle and the skate hardgoods business is that it's more deeply embedded generationally now than it's ever been. So this is a case where the young woman or young man may be buying their first skateboard and dad is buying his again to go skate with them.</p> <p>And I think that this generational aspect that we're seeing that is a pretty -- also a pretty cool thing within this market. And I think that -- what I'm basically saying, I think it makes the potential addressable market in skate hardgoods bigger in through this cycle. And then lastly, what I would say about our unique position relative to this skate hardgoods business is that the consolidation in the marketplace over the last five to 10 years, there are just simply fewer retailers selling skate hardgoods. And so we have been positioned and we are a significant player in the skate hardgoods business around the globe where we do business.</p> <p>We, I believe, just are gaining a larger market share relative to the consolidation that's taking place, which is one of the things we've talked about relative to what retail consolidation means to our business and how we think there's more opportunity for us out there in the next five years. So that's kind of, again, how we're thinking about it, Mitch, from kind of a trend perspective. I don't know if the pandemic is really accelerated or not. What typically I do know is these tend to be multiyear cycles that play out.</p> <p>And again, I think as I described, many trends that are kind of driving this multiyear cycle. I'll let Chris maybe address the magnitude.</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. So I'm going to stay away from talking about just comp numbers just because what we like to do when we talk about categories is to get to the total year. I think what's important to point out and we have disclosed is if we think about hardgoods in general, in 2018, it was 10% of the business. And in 2019, it was 13% of the business.</p> <p>So you can see the impact it had in year 1. And while we need to see how Q3 and Q4 plays out, the impact has been pretty substantial for this year as well, is really our only positive comping category. There is some significance there. So again, I'll stay away from totally quantifying other than to say the kind of growth we've seen from '18 to '19 looks possible in '20 as well.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>And I guess I'd just add in. Chris, you can just confirm this for me. But, Mitch, I think the size of our comps in skate hardgoods were significant. I don't think there's a big difference between their magnitude relative to other.</p> <p>They're obviously larger. But to the magnitude to other comps, I'm not sure there's a big difference between '19 and '20 really now.</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. That's right.</p><p><strong>Mitch Kummetz</strong> -- <em>Pivotal Research Group -- Analyst</em></p> <p>All right. Thanks for the color and good luck.</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Thank you.</p><p><strong>Operator</strong></p><p>[Operator instructions] Our next question comes from Jonathan Komp with Baird. Your line is now open.</p><p><strong>Steve Nowotarski</strong> -- <em>Baird -- Analyst</em></p> <p>Hi. This is Steve Nowotarski on for Jon. I guess my first one is just looking out, how are you thinking about the shape of holiday this year? I know some retailers have talked about maybe having a more extended season, having orders pulled forward, and especially as it pertains to maybe concerns about capacity with shipping and everything. So just any thoughts around the shape of holiday this year.</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. I mean, I think it kind of ties in with how we're thinking about the rest of Q3 and Q4. We just have to stay super nimble. So we're very kind of focused on all the different trends you've laid out as far as volume spreading out and what that might mean around the peak of like a Black Friday weekend, we're focused on what the in-store experience is going to be from a fact of like, will we have metering, or will we have challenges getting people in our doors? How we'll communicate to them? And we're honestly focused on things even like if -- let's say that schools go back to school more uniformly in January.</p> <p>What would that mean to our business? So we have a lot of different scenarios we're playing through, which kind of comes back to what we've talked about earlier of just being nimble. And so I think there's a lot of unknowns. I tried to list some of them earlier. I think the other piece that -- obviously, we have a pending election as well, and we'll see what that means to the fourth quarter.</p> <p>So we see a lot of potential for upside. We see some potential challenges, and we're just going to do our best to navigate through that and see where we can drive this while also really taking advantage of opportunities that are out there for us. I mean, I think that's something else that Rick talked about in his prepared remarks. It's super important to where we're at.</p> <p>We've set ourselves up pretty well from a balance sheet perspective. And while we are very cognizant of whatever challenges can be ahead and ensuring that we can emerge from that in a position of financial strength, we also want to be smart about where potential investments could help us accelerate in this cycle. And we know that from the '08 and '09 recession, we learned a lot and some of our best investments we made over the last decade emerged from that cycle.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>And I'd just add, Steve. We do have a number of tactical things that we're trying to address that we hope will help us get -- as Chris said, build flexibility around the challenges we think we're going to see in the holiday cycle again around does it get stretched out. What happens to peaks in the marketplace? What happens to digital web penetration? How much greater will it be? And what does that mean to the B2C shipping issues and all the challenges that come around that? So we have some tactical things we're working around that we think can help in all those things. We're not going to share all those at this level.</p> <p>But we hope that we can do things tactically that will help us bridge -- that give us the ability to meet consumer expectations and consumer demand.</p><p><strong>Steve Nowotarski</strong> -- <em>Baird -- Analyst</em></p> <p>Yeah. Great. Thanks. And maybe one more just – you know, obviously, it's been really impressive, your ability to manage costs this year.</p> <p>I guess looking out maybe higher level into next year and beyond. How are you thinking about the cost cuts in terms of kind of the permanent structural changes versus kind of more one-time items this year at a higher level?</p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p> <p>Yeah. Thanks. I think this is one of the challenges we're going to have heading into 2021 and probably most retailers will as they think about their business. I mean, we are very proud of how we've been able to manage through this.</p> <p>I think our teams have done a phenomenal job of -- we built the 2020 budget, and we rebuilt it. We've done tons of different scenario planning. We have kind of written the highs and lows and try to navigate through this. But as we think about moving back into 2021, the period the stores were closed, and we think there'll be some sales we can recapture, but there's a significant amount of cost that we've had to manage out.</p> <p>And there are things that are really important to us in our overall philosophy. So as we think about moving into 2021, what we expect to have happen is there will be a step-up in our cost structure and specifically within SG&A, as a result of kind of driving the business back and not having some of the savings of whether they're rent abatements or saving payroll credits or reduced operating hours in malls or reduction of travel or some of our national events. And then starting to layer those back in, where they make sense. And I think one of the things we're figuring out here over the back six months of this year is what that looks like.</p> <p>And something will definitely be coming back to you guys with most likely during our Q4 call but maybe even a little bit in our Q3 call of trying to outline some of that because it is going to be important to make sure we're aligned in that modeling because we do believe it's important to reinstate our national events. They're incredibly focused on training our store managers and moving them along to make them great salespeople and to develop new salespeople. That being said, we're not totally clear what the first three to six months of 2021 is going to look like. And will we be able to bring all of our managers together? And will we be able to bring our district managers together? So those are things we're looking at.</p> <p>We're modeling and working with landlords on what do operating hours look like as we move into holiday and then outside of holiday and how that might look, as well as many other kind of operating procedures and management of marketing events and things like that here that we've done on the corporate side. So over the long term, what I can tell you is there will be probably some sort of rationalization into 2021 and maybe even into 2022. But beyond that, we continue to believe in the philosophy we've executed on over the last couple of years, which is as we look at our more mature markets here in North America and the U.S. and Canada, it's how do we manage those markets on a lower single-digit comp over the long term to really manage costs and make sure that we're making the right investments in the business but also showing some leverage in the business.</p> <p>And then on the international side, to Rick's comments earlier today, we still believe there's a lot of room for growth. And those markets are actually doing quite well despite the pandemic that we have going on here. And we have an international market in Canada that we have driven the profitability and strong cash flow. We think we can do the same thing in Europe and Australia with scale and how we manage those businesses.</p> <p>And we think they're continuing to make strides to that. And so we will manage their cost structure a little differently because they have elevated sales gains with the addition of units, as well as strong comps in newer markets. So they will probably see a more expense growth there but still significantly less than the sales growth. So that we show that leverage and drive them to where we want them to be from a profitability perspective.</p> <p>So a lot to do here, a very complicated situation, but I think that we're well-positioned to navigate through it.</p><p><strong>Steve Nowotarski</strong> -- <em>Baird -- Analyst</em></p> <p>Thanks. Thanks for all the help and answering our questions.</p><p><strong>Operator</strong></p><p>I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Brooks for closing remarks.</p><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p> <p>All right. Thank you. And I just want to close today's call with a big thank you to all of our teams around the world and our brand partners, too, for all their hard work through 2020. And we really appreciate an amazing effort by everyone to really help us serve our mutual customers everywhere we do business.</p> <p>So thank you, everybody, and we look forward again to talking to all of you when we do release the third-quarter earnings in December. Thanks, everybody.</p><p><strong>Operator</strong></p><p>[Operator signoff]</p> <p><strong>Duration: 63 minutes</strong></p><h2>Call participants:</h2><p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p><p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p><p><strong>Sharon Zackfia</strong> -- <em>William Blair -- Analyst</em></p><p><strong>Janine Stichter</strong> -- <em>Jefferies -- Analyst</em></p><p><strong>Jeff Van Sinderen</strong> -- <em>B. Riley FBR -- Analyst</em></p><p><strong>Mitch Kummetz</strong> -- <em>Pivotal Research Group -- Analyst</em></p><p><strong>Steve Nowotarski</strong> -- <em>Baird -- Analyst</em></p>\n<p><a href="https://www.fool.com/quote/zumz">More ZUMZ analysis</a></p>\n<p><a href="https://www.fool.com/earnings-call-transcripts/">All earnings call transcripts</a></p>\n</span>, \n, <span class="article-disclosure" data-content="<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>"><p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p><p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p></span>, \n, <div class="special-message">\n<div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-50415", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ZUMZ"], "primary_tickers_companies": ["Zumiez Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zumiez (ZUMZ) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 67, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-50415"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-50415", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ZUMZ"], "primary_tickers_companies": ["Zumiez Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zumiez (ZUMZ) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 67, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>\n</div>, \n]], ZUMZ earnings call for the period ending June 30, 2020.] | [[\n, [\n, <div class="image imgR"><img alt="Logo of jester cap with thought bubble." src="https://g.foolcdn.com/misc-assets/fool-transcripts-logo.png"/>\n<p class="caption">Image source: The Motley Fool.</p>\n</div>, \n, <p><strong>Zumiez</strong> <span class="ticker" data-id="209251">(<a href="https://www.fool.com/quote/nasdaq/zumiez-inc/zumz/">NASDAQ:ZUMZ</a>)</span><br/>Q2 2020 Earnings Call<br/><span id="date">Sep 10, 2020</span>, <em id="time">5:00 p.m. ET</em></p>, <h2>Contents:</h2>, , <ul> <li>Prepared Remarks</li> <li>Questions and Answers</li> <li>Call Participants</li> </ul>, , <h2>Prepared Remarks:</h2>, , <br/>, , <p><strong>Operator</strong></p>, <p>Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. second-quarter fiscal 2020 earnings conference call. [Operator instructions] Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference call includes comments concerning Zumiez Inc.</p>, , <p>business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez filings with the SEC.</p>, , <p>At this time, I will turn the call over to Rick Brooks, chief executive officer. Please go ahead, sir.</p>, <p><strong>Rick Brooks</strong> -- <em>Chief Executive Officer</em></p>, , <p>Hello, and thank you, everyone, for joining us on the call. With me today is Chris Work, our chief financial officer. I'll begin today's call with a few remarks about the second quarter. Then I'll share some thoughts on back-to-school and the rest of the year before handing call over to Chris, who will take you through the numbers.</p>, , <p>After that, we'll open up the call to your questions. Amidst the most difficult operating conditions the company has ever faced, we delivered better-than-anticipated results. To put some context around our recent performance, when the second quarter started in May, we had only 65 stores opened, which is just 9% of our entire store base. By the end of May, that number had increased to 492 stores or 68% of our store base.</p>, <p></p>, <div id="pitch"><div style="padding: 6px; border: black 2px solid;">\n<p><strong>10 stocks we like better than Zumiez Inc.</strong><br/>When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, <em>Motley Fool Stock Advisor</em>, has tripled the market.* </p>\n<p>David and Tom just revealed what they believe are the <strong><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZumiez%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=c72944dd-96d8-473b-9b21-b7ccb5cc4163">ten best stocks</a></strong> for investors to buy right now… and Zumiez Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.</p>\n<p><a class="ticker_pitch" href="https://infotron.fool.com/infotrack/click?url=https%3A%2F%2Fwww.fool.com%2Fmms%2Fmark%2Fe-foolcom-sa-bbn-dyn%3Faid%3D8867%26source%3Disaeditxt0000652%26company%3DZumiez%2520Inc.%26ftm_cam%3Dsa-bbn-evergreen%26ftm_pit%3D7518%26ftm_veh%3Darticle_pitch&impression=c72944dd-96d8-473b-9b21-b7ccb5cc4163" style="display: inline-block; margin: 5px 0; padding: 10px 35px; color: #fff; font-weight: bold; text-decoration: none; border-radius: 5px; background: #5FA85D; border: solid 1px #43A24A; cursor: pointer;">See the 10 stocks</a></p>\n<p></p><p><em><span style="color: #767676; font-size: 8pt;">*Stock Advisor returns as of September 24, 2020</span></em></p><p></p>\n</div></div>, <p>By the end of June, we hit our peak with 691 stores or 96% of our store base open. Then in July, as a result of governmental orders, we closed a total of 69 stores in California and Australia and ended the second quarter with 645 stores or 90% open. For the quarter, our stores were open for 73% of potential operating days. Despite stores being opened 27% fewer days than a year ago, second-quarter 2020 revenue increased 9.6% as stores that were open, combined with digital activity, comped up 37.3%.</p>, , <p>Our top-line performance was highlighted by robust full-price selling across all geographies. As demand for our distinct and differentiated merchandise assortments and the continued efforts of our teams drove much stronger results than we had anticipated. By geography, we experienced stronger growth in our international markets with Canada, Europe, and Australia, all showing significant comparable sales gains and double-digit total sales growth despite closures in the period. As we discussed on our Q1 call in June, from the onset of the pandemic, we made some difficult near-term decisions around our expense structure in order to weather this crisis and emerge in a position of strength.</p>, , <p>This included laying off virtually all of our part-time staff, suspending all hiring, eliminating substantially all planned fiscal 2020 bonuses, and eliminating the majority of merit raises. Other operational changes we have made during Q1 and across Q2 include reducing store labor to reflect restricted operating hours, eliminating travel across all areas of the business, canceling national training and certain marketing events, and looking for the other costs that could be eliminated or delayed as a result of the current environment. These combined actions, coupled with the increased sales activity, allowed us to significantly leverage the business, contributing to second-quarter earnings per share of $1.01 and favorable cash generation, with close to $300 million in cash and marketable securities on our balance sheet and no debt, we believe we are well-positioned to navigate what is likely to be a volatile operating environment over the next few quarters while investing strategically in the business. These results in this environment underscore the strength of our brand and culture and speaks to the ability of our business model to adapt to change.</p>, , <p>We have discussed at length over the years the significance of our culture and brand and how they serve as critical competitive advantages that have helped us win throughout our 40-plus year history. The most significant component of our culture and brand has always been and will always be our people. The investment we made in supporting our full-time employees throughout the pandemic paid dividends in the second quarter as they were able to quickly and successfully execute the reopening of nearly our entire store base while continuing to service and engage with our customers physically and digitally. As it has in the past, I am confident that our unwavering commitment to our people will continue to further set Zumiez apart from the competition and meaningfully benefit our long-term performance.</p>, , <p>Looking ahead, there is still a great deal of uncertainty about the state of retail and the global economy due to the impacts from COVID-19. We are currently experiencing the effects the health crisis is having on back-to-school as many states and districts around the country have delayed the start of the new school year or decided to begin with virtual instruction. As a result, we did not see the sustained lift in demand we typically do starting in late July and running through early September. To date, the third quarter has been meaningfully impacted by the timing of back-to-school and the impact of virtual learning but has generally gotten stronger each week as we've moved through the quarter.</p>, , <p>At this point, we believe we are likely to see a more prolonged back-to-school season with some demand shifting out to later in the third quarter. However, we are currently planning the entire season to be meaningfully below the prior year. With regard to the upcoming holiday season, there are also a number of unknowns as is unclear what happens with the virus as we get into winter, how governments and individuals will respond, what impacts a pending election could have on our results, as well as the uncertainty around the financial condition of the consumer. What I do know is that Zumiez is well-positioned to pivot to meet the needs of our customers wherever, whenever, and however they want to engage with us, thanks to our dynamic teams and our one-channel mentality.</p>, , <p>Periods of significant change create opportunities. Companies that have the right people, strategies, and resources in place can take advantage of times like this to advance their brand and business. While Zumiez isn't fully immune to disruption created by the pandemic, we do believe the current environment will accelerate further consolidation globally and that our focus on the consumer will lead to further wallet and mind share gains as we emerge from the crisis. We must be smart in how we navigate the business challenges while also looking for long-term strategic investments that will set us up for the future.</p>, , <p>These include great real estate opportunities, new tools within our omnichannel formats, and other strategic investments to support the next era of intimacy and now with our customers. The strength in our financial position can be a significant advantage in these times. I have great confidence in our teams and their proven ability to navigate through unforeseen challenges. Our response to pandemic has highlighted the strength of our culture and brand and bolstered my optimism about emerging even stronger from this current crisis.</p>, , <p>With that, I'll turn the call to Chris to discuss the financials. </p>, <p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p>, , <p>Thanks, Rick, and good afternoon, everyone. I'm going to start with a few high-level comments on the financial strength of the business, review our second quarter, and then provide an update on the quarter-to-date sales through Labor Day before discussing a few updates on the full year. We entered fiscal 2020 in a strong financial position with cash and marketable securities over $250 million and coming off the highest earnings per share in the history of our company. This resulted from years of commitment and hard work by our teams, coupled with strong financial planning.</p>, , <p>Now, for the closure and subsequent reopen, we have continued to see the strength of our one-channel model with our teams working diligently to serve the customer. The business ended the second quarter in a strong financial position. Cash and current marketable securities increased 58.6% to $299.1 million as of August 1, 2020, compared to $188.6 million as of August 3, 2019. The increase in cash and current marketable securities was driven by cash generated through operations, including deferment and reductions of $41.5 million composed of landlord payments, lower inventory levels, extended vendor terms, and deferred payroll tax payments.</p>, , <p>In addition to net income improvements related to abatements, credits, and expense reductions, this increase was partially offset by $13.4 million of share repurchases through the company's stock-buyback program prior to our stores closing due to COVID-19 and other planned capital expenditures. As of August 1, 2020, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the second quarter of 2020 with $126.7 million in inventory compared with $151.1 million of inventory last year, a decrease to $24.4 million or 16.1%. During the first quarter, our merchandising teams canceled or pushed out orders in Q1 to curb the impact of declining sales due to store closures, with demand in reopened stores exceeding our expectations in the second quarter, we increased our planned receipts meaningfully and still ended the quarter light on inventory across most categories with certain areas of our business significantly impacted by a delayed supply chain.</p>, , <p>Overall, the inventory on hand is well-positioned and selling at a favorable margin entering the third quarter. Turning to the income statement. Second-quarter net sales increased 9.6% to $250.4 million, compared to $228.4 million for the second quarter of 2019. The increase in sales was driven by a 37.3% increase in comparable sales which includes reopened stores and our digital activity, partially offset by store closures during the period.</p>, , <p>Breaking down the comparable sales further, we saw meaningful strength, both digitally and as our stores reopened, with comparable sales in stores over 20% and digital comparable sales for the quarter over 122%. As Rick mentioned, our stores were open for roughly 73% of potential operating days during the second quarter of 2020. And with the highest concentration of stores opened in June, we saw our strongest results in that month. From a regional perspective, North America net sales increased $16.5 million or 8% to $223.5 million.</p>, , <p>Other international net sales, which consist of Europe and Australia, increased $5.5 million or 25.4% to $26.9 million. Excluding the impact of foreign currency translation, North America net sales increased 8.2% and other international net sales increased 25.8% for the quarter. From a category perspective, all categories were up in total sales with the exception of footwear with hardgoods being our most positive, followed by men's clothing, women's clothing, and accessories. Second-quarter gross profit was $90.9 million, compared to $77.2 million in the second quarter last year, and gross margin was 36.3% compared to 33.8% a year ago.</p>, , <p>The 250-basis-point increase in gross margin was primarily driven by a 170-basis-point increase in product margin, 160-basis-point decrease in store occupancy costs, a 50-basis-point decrease in distribution costs, and 20-basis-point decrease in inventory shrinkage. This was partially offset by a 160-basis-point increase in web shipping costs due to increased web activity as a result of COVID-19 related to store closures. However, shipping costs leveraged to the prior year were compared to total web sales. SG&A expense was $57.7 million in the second quarter, compared to $65.5 million a year ago.</p>, , <p>A decrease of $7.8 million or 11.9%. SG&A expense as a percent of net sales decreased 560 basis points for the quarter to 23.1% of total sales. The decrease was primarily driven by a 240-basis-point decrease in our store wages, a 100-basis-point leverage in other store costs, a 70-basis-point decrease due to governmental payroll credits, a 70-basis-point decrease in corporate costs, a 40-basis-point decrease in corporate wages, a 30-basis-point decrease in the accrual of annual incentive compensation, and a 20-basis-point decrease in national training and recognition events. Operating income in the second quarter of 2020 was $33.1 million or 13.2% of net sales, compared with operating income in the prior year of $11.7 million or 5.1% of net sales.</p>, , <p>During the quarter, we recognized flow through on incremental sales of almost 100% based on the factors outlined above and our ability to adjust quickly in this challenging time. Net income for the second quarter was $25.4 million or $1.01 per share, compared to net income of $9 million or $0.36 per share for the second quarter of 2019. Our effective tax rate for the second quarter of 2020 was 26% compared with 30.7% in the year-ago period. Now, to our fiscal third quarter-to-date sales results.</p>, , <p>We are providing quarter-to-date sales through Labor Day, Monday, September 7, as this time period is more comparable to the prior year given the shift in the Labor Day holiday. Total third quarter-to-date sales for the 37 days ending September 7, 2020, were down approximately 14% compared with the same 37-day time period in the prior year ended September 9, 2019. For this same time period, our stores were open for 91% of the potential operating days due to ongoing mandated store closures, primarily in California, Hawaii, and Australia. Total comparable sales for the 37-day period ended September 7, 2020, were down 5.1%.</p>, , <p>By channel, our open store comparable sales decreased 10.7%, and our e-commerce sales increased 27.4%. The quarter-to-date comparable sales decrease discussed above was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased due to an increase in units per transaction offset by a decline in average unit retail. Quarter to date, total sales increased in our hardgoods category.</p>, , <p>All other categories were down in total sales quarter to date with footwear being the most negative followed by men's, women's, and accessories. Our overall quarter-to-date performance reflect the delayed start to back-to-school with many states and districts pushing back their start date. The impact to schools going back virtually and continued store closures. Looking at the weekly cadence of our results in August, they generally improved each week and we continue to believe that there may be opportunity for a prolonged back-to-school season into September and October.</p>, , <p>Due to limited visibility to the business, we will not be providing guidance for the third quarter of 2020 or the fiscal year. That said, we do want to give a few thoughts on how we're looking at 2020. We are expecting sales for the third quarter to be down to the prior year. However, we believe our results will be better than the previously disclosed third quarter-to-date sales decline of approximately 14%.</p>, , <p>We experienced a product margin increase of 170 basis points in the second quarter and a positive start to the third quarter. We are managing inventory tightly and working with our brand partners to navigate this environment. In the third quarter, we expect to see a benefit in product margin to the prior year but do not anticipate that it will be as significant as the year-over-year growth experienced in our second quarter. We continue to manage costs across the business, understanding this challenging environment, and limited visibility.</p>, , <p>Through the first six months, we have seen significant reductions in certain expenses as we work to align the cost structure to the sales loss during our closure and potential for greater economic losses as we move through the year. We are currently planning SG&A expenses across the business to be down 12.5% compared with 2019 associated with reductions in store operating hours, travel and training, planned capital, incentive compensation, and many other benefits. With the potential variability in performance over the back half of the year, this estimate could increase or decrease as we gain more visibility to the sales trends, our ability to adjust expenses, and the potential for noncash impairments. We now expect to open approximately 10 new stores in 2020, including two stores in North America, seven stores in Europe, and one store in Australia.</p>, , <p>This is down from our plan coming into the year of 20 new stores. We expect capital expenditures for the full 2020 fiscal year to be approximately $11 million, compared to $19 million in 2019 and our original plan for 2020 of between $18 million and $20 million. The majority of our capital spend will be dedicated to new store openings and planned remodels. We expect the depreciation and amortization, excluding non-cash lease expense, will be approximately $24 million, down slightly from the prior year.</p>, , <p>And we are currently projecting our share count for the full year to be approximately 25.3 million shares. At this point, we are not expecting any further share repurchases until we have better visibility into the business. With that, operator, we'd like to open the call up for your questions.</p>, , <div class="interad">\n<!-- Create container for ad -->\n<!--Regular Ad --> <!--content1_desk-->\n<div class="dfp-ads ad" id="div-content1_desk-84106">\n<script type="text/javascript">\n googletag.cmd.push(function() {\n googletag.display('div-content1_desk-84106');\n });\n </script>\n</div>\n</div>, <h2>Questions & Answers:</h2>, <br/>, , <p><strong>Operator</strong></p>, <p>[Operator instructions] Our first question comes from Sharon Zackfia with William Blair. Your line is now open.</p>, <p><strong>Sharon Zackfia</strong> -- <em>William Blair -- Analyst</em></p>, , <p>Hey, good afternoon. Congratulations. I guess a question on the inventory position. I think it was, Chris, that you said you thought you were in a good position, but it looks pretty down even relative to the sales you indicated for back-to-school.</p>, , <p>So I mean, are there pockets of scarcity in your inventory at this point? And how well positioned are you to chase sales if it's a prolonged back-to-school? And then just curious on your thoughts on store development beyond 2020, considering you're rebounding and doing much, much better than most others in this environment.</p>, <p><strong>Chris Work</strong> -- <em>Chief Financial Officer</em></p>, , <p>Sure, Sharon. Happy to start with the inventory, and then we'll tackle the store question. From an inventory perspective, as I mentioned in the prepared remarks, it's been obviously a roller coaster of a year. As the first quarter hit us and the store closures, our buying teams worked very diligently to work with our vendors to push out products, canceling over $100 million of purchase orders.</p>, , <p>And then once we opened in the latter part of April and into May, we started to really see elevated results from where our expectations were. And that put them in the opposite situation of really chasing. And then I think you couple that with where we have been from getting the supply chain up and running created quite a few challenges as we move through the period. So a really great testament to our buying teams of reacting and bringing product in and our distribution and operations teams and moving it through the channel.</p>, , <p>And ultimately, our store teams in executing on how they did with our customers, both physically in-store and digitally, but it was not without challenges. And so I think as we look at inventory and we look at how we ended the quarter, we would definitely say we were lighter than we wanted to be. I would tell you inventory is very clean. So when I say we execute inventory in a good position, we feel very good about the makeup of our inventory, but we certainly would have liked to have had more of it specifically in categories like hardgoods and footwear, which were probably two of our more challenging areas.</p>, , <p>I think this also gets into kind of the supply chain and how we're working through that. And I know there's been a lot of retailers who have talked about the varying degrees of challenges in the first six months of the year. And well, as we look at this, the challenges sort of started, which is getting back up and running after the closure period and then kind of move to getting all the products we want, getting it at the timing of our deliveries and then the increased demands on the overall ecosystem, including getting things from our distribution center to our stores, as well as our stores to customers just based on the elevated volume levels. And then I think as we look forward, we also are thinking about the potential for some peak surcharges that are out there and what other operating challenges we might have.</p>, , <p>So as you can imagine, we continue to try to plan for this, and we believe that our one-channel philosophy actually puts us in a pretty good position in how to work through this because we're shipping generally much closer to the customer. We have a distributed network of stores doing the shipping, which has been pretty helpful. And we're continuing to work with our shipping partners, as well as execute our own mitigation techniques to the risks that are in front of us. So I think, overall, as we continue to manage through this as we've moved through August, we started to see the inventories rightsized a little bit more.</p>, ...], \n, [<p><em>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our </em><a href="https://www.fool.com/legal/terms-and-conditions/fool-rules"><em>Terms and Conditions</em></a><em> for additional details, including our Obligatory Capitalized Disclaimers of Liability.</em></p>, <p><i><a href="http://boards.fool.com/profile/MFTranscribing/info.aspx">Motley Fool Transcribing</a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a <a href="http://www.fool.com/Legal/fool-disclosure-policy.aspx">disclosure policy</a>.</i></p>], \n, [\n, <div class="promoboxAd">\n<div class="promobox-content" data-params='{"divId": "div-promobox-50415", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ZUMZ"], "primary_tickers_companies": ["Zumiez Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zumiez (ZUMZ) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 67, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""}' id="div-promobox-50415"></div><script type="text/javascript">fool.ui.onFirstScroll(() => {PitcherAds.get({"divId": "div-promobox-50415", "placement": "promobox", "height": 300, "width": 470, "pos": 0, "position": 0, "segment": "default", "seg": "default", "tstrId": "", "bureau": "usmf-consumer-goods", "tickers": "[\"\"]", "primary_tickers": ["ZUMZ"], "primary_tickers_companies": ["Zumiez Inc."], "pitchId": null, "collection": "/earnings/call-transcripts", "headline": "Zumiez (ZUMZ) Q2 2020 Earnings Call Transcript", "adtags": "[\"yahoo-news\", \"msn\", \"default-partners\"]", "test_bucket": 67, "session_count": 0, "ten_or_more_sessions": false, "services": [], "uid": ""})});</script>\n</div>, \n], \n]] | ZUMZ earnings call for the period ending June 30, 2020. | Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. second-quarter fiscal 2020 earnings conference call. [Operator instructions] Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference call includes comments concerning Zumiez Inc.\n business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez filings with the SEC.\n At this time, I will turn the call over to Rick Brooks, chief executive officer. Please go ahead, sir.\n Hello, and thank you, everyone, for joining us on the call. With me today is Chris Work, our chief financial officer. I'll begin today's call with a few remarks about the second quarter. Then I'll share some thoughts on back-to-school and the rest of the year before handing call over to Chris, who will take you through the numbers.\n After that, we'll open up the call to your questions. Amidst the most difficult operating conditions the company has ever faced, we delivered better-than-anticipated results. To put some context around our recent performance, when the second quarter started in May, we had only 65 stores opened, which is just 9% of our entire store base. By the end of May, that number had increased to 492 stores or 68% of our store base.\n By the end of June, we hit our peak with 691 stores or 96% of our store base open. Then in July, as a result of governmental orders, we closed a total of 69 stores in California and Australia and ended the second quarter with 645 stores or 90% open. For the quarter, our stores were open for 73% of potential operating days. Despite stores being opened 27% fewer days than a year ago, second-quarter 2020 revenue increased 9.6% as stores that were open, combined with digital activity, comped up 37.3%.\n Our top-line performance was highlighted by robust full-price selling across all geographies. As demand for our distinct and differentiated merchandise assortments and the continued efforts of our teams drove much stronger results than we had anticipated. By geography, we experienced stronger growth in our international markets with Canada, Europe, and Australia, all showing significant comparable sales gains and double-digit total sales growth despite closures in the period. As we discussed on our Q1 call in June, from the onset of the pandemic, we made some difficult near-term decisions around our expense structure in order to weather this crisis and emerge in a position of strength.\n This included laying off virtually all of our part-time staff, suspending all hiring, eliminating substantially all planned fiscal 2020 bonuses, and eliminating the majority of merit raises. Other operational changes we have made during Q1 and across Q2 include reducing store labor to reflect restricted operating hours, eliminating travel across all areas of the business, canceling national training and certain marketing events, and looking for the other costs that could be eliminated or delayed as a result of the current environment. These combined actions, coupled with the increased sales activity, allowed us to significantly leverage the business, contributing to second-quarter earnings per share of $1.01 and favorable cash generation, with close to $300 million in cash and marketable securities on our balance sheet and no debt, we believe we are well-positioned to navigate what is likely to be a volatile operating environment over the next few quarters while investing strategically in the business. These results in this environment underscore the strength of our brand and culture and speaks to the ability of our business model to adapt to change.\n We have discussed at length over the years the significance of our culture and brand and how they serve as critical competitive advantages that have helped us win throughout our 40-plus year history. The most significant component of our culture and brand has always been and will always be our people. The investment we made in supporting our full-time employees throughout the pandemic paid dividends in the second quarter as they were able to quickly and successfully execute the reopening of nearly our entire store base while continuing to service and engage with our customers physically and digitally. As it has in the past, I am confident that our unwavering commitment to our people will continue to further set Zumiez apart from the competition and meaningfully benefit our long-term performance.\n Looking ahead, there is still a great deal of uncertainty about the state of retail and the global economy due to the impacts from COVID-19. We are currently experiencing the effects the health crisis is having on back-to-school as many states and districts around the country have delayed the start of the new school year or decided to begin with virtual instruction. As a result, we did not see the sustained lift in demand we typically do starting in late July and running through early September. To date, the third quarter has been meaningfully impacted by the timing of back-to-school and the impact of virtual learning but has generally gotten stronger each week as we've moved through the quarter.\n At this point, we believe we are likely to see a more prolonged back-to-school season with some demand shifting out to later in the third quarter. However, we are currently planning the entire season to be meaningfully below the prior year. With regard to the upcoming holiday season, there are also a number of unknowns as is unclear what happens with the virus as we get into winter, how governments and individuals will respond, what impacts a pending election could have on our results, as well as the uncertainty around the financial condition of the consumer. What I do know is that Zumiez is well-positioned to pivot to meet the needs of our customers wherever, whenever, and however they want to engage with us, thanks to our dynamic teams and our one-channel mentality.\n Periods of significant change create opportunities. Companies that have the right people, strategies, and resources in place can take advantage of times like this to advance their brand and business. While Zumiez isn't fully immune to disruption created by the pandemic, we do believe the current environment will accelerate further consolidation globally and that our focus on the consumer will lead to further wallet and mind share gains as we emerge from the crisis. We must be smart in how we navigate the business challenges while also looking for long-term strategic investments that will set us up for the future.\n These include great real estate opportunities, new tools within our omnichannel formats, and other strategic investments to support the next era of intimacy and now with our customers. The strength in our financial position can be a significant advantage in these times. I have great confidence in our teams and their proven ability to navigate through unforeseen challenges. Our response to pandemic has highlighted the strength of our culture and brand and bolstered my optimism about emerging even stronger from this current crisis.\n Thanks, Rick, and good afternoon, everyone. I'm going to start with a few high-level comments on the financial strength of the business, review our second quarter, and then provide an update on the quarter-to-date sales through Labor Day before discussing a few updates on the full year. We entered fiscal 2020 in a strong financial position with cash and marketable securities over $250 million and coming off the highest earnings per share in the history of our company. This resulted from years of commitment and hard work by our teams, coupled with strong financial planning.\n Now, for the closure and subsequent reopen, we have continued to see the strength of our one-channel model with our teams working diligently to serve the customer. The business ended the second quarter in a strong financial position. Cash and current marketable securities increased 58.6% to $299.1 million as of August 1, 2020, compared to $188.6 million as of August 3, 2019. The increase in cash and current marketable securities was driven by cash generated through operations, including deferment and reductions of $41.5 million composed of landlord payments, lower inventory levels, extended vendor terms, and deferred payroll tax payments.\n In addition to net income improvements related to abatements, credits, and expense reductions, this increase was partially offset by $13.4 million of share repurchases through the company's stock-buyback program prior to our stores closing due to COVID-19 and other planned capital expenditures. As of August 1, 2020, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the second quarter of 2020 with $126.7 million in inventory compared with $151.1 million of inventory last year, a decrease to $24.4 million or 16.1%. During the first quarter, our merchandising teams canceled or pushed out orders in Q1 to curb the impact of declining sales due to store closures, with demand in reopened stores exceeding our expectations in the second quarter, we increased our planned receipts meaningfully and still ended the quarter light on inventory across most categories with certain areas of our business significantly impacted by a delayed supply chain.\n Overall, the inventory on hand is well-positioned and selling at a favorable margin entering the third quarter. Turning to the income statement. Second-quarter net sales increased 9.6% to $250.4 million, compared to $228.4 million for the second quarter of 2019. The increase in sales was driven by a 37.3% increase in comparable sales which includes reopened stores and our digital activity, partially offset by store closures during the period.\n Breaking down the comparable sales further, we saw meaningful strength, both digitally and as our stores reopened, with comparable sales in stores over 20% and digital comparable sales for the quarter over 122%. As Rick mentioned, our stores were open for roughly 73% of potential operating days during the second quarter of 2020. And with the highest concentration of stores opened in June, we saw our strongest results in that month. From a regional perspective, North America net sales increased $16.5 million or 8% to $223.5 million.\n Other international net sales, which consist of Europe and Australia, increased $5.5 million or 25.4% to $26.9 million. Excluding the impact of foreign currency translation, North America net sales increased 8.2% and other international net sales increased 25.8% for the quarter. From a category perspective, all categories were up in total sales with the exception of footwear with hardgoods being our most positive, followed by men's clothing, women's clothing, and accessories. Second-quarter gross profit was $90.9 million, compared to $77.2 million in the second quarter last year, and gross margin was 36.3% compared to 33.8% a year ago.\n The 250-basis-point increase in gross margin was primarily driven by a 170-basis-point increase in product margin, 160-basis-point decrease in store occupancy costs, a 50-basis-point decrease in distribution costs, and 20-basis-point decrease in inventory shrinkage. This was partially offset by a 160-basis-point increase in web shipping costs due to increased web activity as a result of COVID-19 related to store closures. However, shipping costs leveraged to the prior year were compared to total web sales. SG&A expense was $57.7 million in the second quarter, compared to $65.5 million a year ago.\n A decrease of $7.8 million or 11.9%. SG&A expense as a percent of net sales decreased 560 basis points for the quarter to 23.1% of total sales. The decrease was primarily driven by a 240-basis-point decrease in our store wages, a 100-basis-point leverage in other store costs, a 70-basis-point decrease due to governmental payroll credits, a 70-basis-point decrease in corporate costs, a 40-basis-point decrease in corporate wages, a 30-basis-point decrease in the accrual of annual incentive compensation, and a 20-basis-point decrease in national training and recognition events. Operating income in the second quarter of 2020 was $33.1 million or 13.2% of net sales, compared with operating income in the prior year of $11.7 million or 5.1% of net sales.\n During the quarter, we recognized flow through on incremental sales of almost 100% based on the factors outlined above and our ability to adjust quickly in this challenging time. Net income for the second quarter was $25.4 million or $1.01 per share, compared to net income of $9 million or $0.36 per share for the second quarter of 2019. Our effective tax rate for the second quarter of 2020 was 26% compared with 30.7% in the year-ago period. Now, to our fiscal third quarter-to-date sales results.\n We are providing quarter-to-date sales through Labor Day, Monday, September 7, as this time period is more comparable to the prior year given the shift in the Labor Day holiday. Total third quarter-to-date sales for the 37 days ending September 7, 2020, were down approximately 14% compared with the same 37-day time period in the prior year ended September 9, 2019. For this same time period, our stores were open for 91% of the potential operating days due to ongoing mandated store closures, primarily in California, Hawaii, and Australia. Total comparable sales for the 37-day period ended September 7, 2020, were down 5.1%.\n By channel, our open store comparable sales decreased 10.7%, and our e-commerce sales increased 27.4%. The quarter-to-date comparable sales decrease discussed above was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased due to an increase in units per transaction offset by a decline in average unit retail. Quarter to date, total sales increased in our hardgoods category.\n All other categories were down in total sales quarter to date with footwear being the most negative followed by men's, women's, and accessories. Our overall quarter-to-date performance reflect the delayed start to back-to-school with many states and districts pushing back their start date. The impact to schools going back virtually and continued store closures. Looking at the weekly cadence of our results in August, they generally improved each week and we continue to believe that there may be opportunity for a prolonged back-to-school season into September and October.\n Due to limited visibility to the business, we will not be providing guidance for the third quarter of 2020 or the fiscal year. That said, we do want to give a few thoughts on how we're looking at 2020. We are expecting sales for the third quarter to be down to the prior year. However, we believe our results will be better than the previously disclosed third quarter-to-date sales decline of approximately 14%.\n We experienced a product margin increase of 170 basis points in the second quarter and a positive start to the third quarter. We are managing inventory tightly and working with our brand partners to navigate this environment. In the third quarter, we expect to see a benefit in product margin to the prior year but do not anticipate that it will be as significant as the year-over-year growth experienced in our second quarter. We continue to manage costs across the business, understanding this challenging environment, and limited visibility.\n Through the first six months, we have seen significant reductions in certain expenses as we work to align the cost structure to the sales loss during our closure and potential for greater economic losses as we move through the year. We are currently planning SG&A expenses across the business to be down 12.5% compared with 2019 associated with reductions in store operating hours, travel and training, planned capital, incentive compensation, and many other benefits. With the potential variability in performance over the back half of the year, this estimate could increase or decrease as we gain more visibility to the sales trends, our ability to adjust expenses, and the potential for noncash impairments. We now expect to open approximately 10 new stores in 2020, including two stores in North America, seven stores in Europe, and one store in Australia.\n This is down from our plan coming into the year of 20 new stores. We expect capital expenditures for the full 2020 fiscal year to be approximately $11 million, compared to $19 million in 2019 and our original plan for 2020 of between $18 million and $20 million. The majority of our capital spend will be dedicated to new store openings and planned remodels. We expect the depreciation and amortization, excluding non-cash lease expense, will be approximately $24 million, down slightly from the prior year.\n And we are currently projecting our share count for the full year to be approximately 25.3 million shares. At this point, we are not expecting any further share repurchases until we have better visibility into the business. With that, operator, we'd like to open the call up for your questions.\n | Zumiez | (NASDAQ:ZUMZ) | Sep 10, 2020 | 5:00 p.m. ET | 5 | pm | 2020-09-10 | 2020-09-11 | 2020-09-10 | 2020-09-14 | NASDAQ | The strength in our financial position can be a significant advantage in these times. | The strength in our financial position can be a significant advantage in these times. | [0.76779294 0.00741154 0.22479542] | positive | 0.760381 | 2020-09-14 | 27.650000 | 29.950001 | 26.670000 | 28.440001 | 2168180.0 | 29.224300 | 31.330000 | 29.224001 | 31.080000 | 992290.0 | Retail | 2020-06-30 | 2020-06-30 | -0.79 | -0.549341 | 2020-06-30 | ZUMZ | -0.240659 | miss | 3.430000 | increase | 1 | positive |